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This doesn't mean what people think it means. They adjust the inflation rate every 6 months https://www.treasurydirect.gov/indiv/research/indepth/ibonds... . Right now it yields 7.12% because the last inflation number was really high, but once inflation goes back to normal, the yield will be much lower.
Is it transitory as they unflinchingly claimed or are we in the Carter Years?
I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of using something like a CD?
CDs are FDIC insured, bonds aren't. This doesn't make a big difference when we're talking government bonds, but you can lose your shirt on a regular corporate/muni bond. You'll always get CD money back (subject to 250k FDIC limit)
Bonds also are also an asset that fluctuates in price: A bond can be sold at a price different from it's face value. This means that if interest rates rise, you're going to not be able to sell the bond for the same price you've bought it for. This is because you need to make up for the lower interest rate. CDs are just basically a loan on cash. Bonds are an asset (not cash!) that pays interest.
Earlier quoted context omitted.
It’s about as safe an investment you can make and it’s a super high yield.
But the rate is only for 6 months and limited to $10000 per SSN per year, which does not make it terribly useful.
Edit: I agree this could be a sign of something long term
Edit: recent history of rates
-- Inflation rates --
Nov 2021 3.56%
May 2021 1.77%
Nov 2020 0.84%
May 2020 0.53%
Nov 2019 1.01%
May 2019 0.70%
Nov 2018 1.16%
May 2018 1.11%
Nov 2017 1.24%
May 2017 0.98%
Nov 2016 1.38%
May 2016 0.08%
Nov 2015 0.77%
May 2015 -0.80%
-- Fixed Rates above 0 or .1% --
Nov 2019 0.20%
May 2019 0.50%
Nov 2018 0.50%
May 2018 0.30%
The overall rate can't go below 0% The formula is: fixed rate + (2 * inflation rate) + (fixed rate * inflation rate)
So for these 6 months: 0 + (2 * 0.0356) + (0 * 0.0356)] = 0.0712
Earlier quoted context omitted.
I bonds in particular cannot be cashed out before 12 months, and before 5 years there is a penalty. Bonds are not covered by FDIC insurance and can default (though less relevant for US Treasury bonds which can print USD and more relevant for corporate/foreign bonds).
What stops you selling them to someone else?
I have an Ally bank account. Over the past couple years, they've been great about religiously informing me of my interest rates dropping to almost zero. I see something like this and just have to laugh. When will I get my increase notification?
I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of using something like a CD?
CDs, TIPS (Treasury Inflation Protected Securities), MBS (Mortgage Backed Securities), Munis, Corporates... these are all so called "debt instruments".
Your question is roughly equivalent to "What is the downsides to investing into Stocks instead of AAPL??" Well... sometimes AAPL goes up, sometimes it goes down. Stocks are... well... AAPL -IS- a stock.
Similarly, CDs are typically a specific kind of bond: the type you get from a bank. But banks also sell traditional bonds.
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The main benefits of CDs is that they're (usually, but not always) FDIC insured. So if the bank goes bankrupt, the US Government steps in and will give you your money back.
The main benefits of "bonds" (which are a very, very broad category consisting of literally thousands, maybe millions of different things)... is that typical bonds can be sold on the open market.
That means that if the interest rates go down, you can sell bonds at a higher price. (Look, I have a 5% bond, and all you suckers are stuck getting 0.5%. Feel like trading? I'll sell you my $10,000 5% bond to you for $11,000.)
Of course, if interest rates go up, then bonds lose value. (Shoot, I have a 0.1% bond and everyone else has 0.5% bonds. I don't want to be stuck with this anymore, feel like buying this $10,000 bond off of me for $8500?)
I'm kind of an idiot with anything terribly elaborate in the financial world, so forgive a bit of a dumb question: what are the downsides to bonds instead of using something like a CD?