On November 2, 2022, I shared my thoughts on the state of the economy when the S&P 500 was at 3,750. I was feeling pretty optimistic, thanks to the latest Series I Bond rate, and decided to buy some stocks. Let me walk you through my thought process, which has been shaped by my experience as an investor since 1995.
In a bear market, it’s tough to find reasons to be hopeful. But I’ve found a pretty big one! The Treasury Department recently announced that Series I Bonds will pay an annualized interest of 6.89% from November 1, 2022, through April 2023. That’s a significant drop from the 9.62% rate offered since May 2022.
So, what does this mean? Well, most people might just see the rate for what it is. But as a Financial Samurai, you need to think deeper. The lower Series I Bond interest rate suggests that the government believes inflation has peaked and is on its way down. This is based on the historical CPI rate from the past six months.
This is good news for risk assets. But I don’t think investors have fully grasped the significance of the I Bond rate decline. A 2.73% decline shows how quickly both inflation and interest rates can move down in a six-month period.
The government has to act in line with the data. It doesn’t want to pay a higher interest than necessary. If it knows inflation and interest rates are coming down, it won’t pay a higher interest rate for the next six months on its debt.
At the same time, the Series I Bond interest rate has to be competitive enough to attract capital over the next six months. If the interest rate isn’t high enough, the government won’t be able to meet its capital raising target from Series I Bonds.
From the latest Series I Bond interest rate, we can assume that the upcoming inflation figures will either be below expectations or have a blended overall inflation rate below expectations. This means we should see an increase in risk appetite for stocks, real estate, and other risk assets.
The new Series I Bond interest rate makes me more confident that the worst is over. In other words, I believe that the S&P 500 hit its lowest point at 3,577 on October 17, 2022, during this bear market.
If the S&P 500 dips below 3,600 again, I would be an aggressive buyer. I’m also planning to buy under 3,700 and nibble under 3,800.
The other implication of a lower Series I Bond rate is that it’s a good time to make low-ball real estate offers. The Series I Bond interest rate suggests that mortgage rates will start to decrease as well. The average 30-year fixed-rate mortgage may decline to 4.5% – 5% by April 2023. If so, the demand for real estate will pick back up.
Winter is my favorite time of the year to hunt for real estate deals. If you can get a panic seller to sell for 10-20% below April 2022 comps, I think you’re going to do great.
You don’t have to buy an entire property and take on debt either. You can buy a public REIT, a private real estate fund, or invest in individual private real estate deals to more slowly leg in.
On Friday, April 29, 2023, the Treasury raised the fixed interest rate for I bonds from 0.40% to 0.90% but dropped the semiannual inflation rate to 1.69%. This resulted in a combined interest rate of 4.3% for newly issued bonds.
So, did you connect the dots about the latest Series I Bond rate and expectations for inflation and risk assets? Are there any other bullish economic indicators you are looking at that gives you hope for the future?
What type of action are you taking today? Remember, this article is not my investment advice to you. Please do your own due diligence and invest at your own risk. There are no guarantees when it comes to investing in risk assets.
To gain an unfair competitive advantage in building wealth, read Buy This, Not That. It was written exactly for volatile times like these. I synthesize my 27+ years of investing experience to help you make better financial and life choices.
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