On November 2, 2022, I published this post when the S&P 500 was at 3,750. Based on the latest Series I Bond rate, I thought it was a bullish economic indicator. As a result, I bought stocks. Please review my thought process and how I think as an investor since 1995.
In a bear market, it's hard to find bullish economic indicators. We're always searching for silver linings to live better during difficult times. Thus, the good news is that I've found the most positive economic indicator yet!
This week, the Treasury Department announced Series I Bonds will pay an annualized interest from November 1, 2022 through April 2023 of 6.89%, down from the 9.62% rate offered since May 2022. A 2.73% decline is massive.
What does this really mean? Most people seeing the news will just look at the rate for what it is. However, as a Financial Samurai, you think in derivatives. You try to connect the dots to improve your finances.
The lower Series I Bond interest rate means the government believes inflation has peaked and is heading down. It is based on the historical CPI rate from the past six months, which is also gathered and reported by the government.
As a result, this is a bullish economic indicator for risk assets. But I don't think investors have fully recognized the significance of the I Bond rate decline just yet. A 2.73% decline shows how quickly both inflation and interest rates can move down in a six-month period.
Government Must Act Consistently With The Data
Given one of the goals of government is to be fiscally responsible. The government isn't willing to pay a higher interest than it has to. If you know inflation, and therefore interest rates are coming down, you aren't going to pay a higher interest rate for the next six months on your 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 is not high enough, then the government won't be able to meet its capital raising target from Series I Bonds to fund whatever it plans to fund.
The government has shown us its cards! Its action must be consistent with the data.
Can you imagine playing poker and seeing all your opponents' hole cards? You can make higher expected value bets as a result.
Bullish Economic Indicator And Its Implications
From the latest Series I Bond interest rate , we can assume inflation figures coming out on November 10, December 13, January 12, Feb 14, March 14, April 12, and May 10 will either be below inflation expectations or have a blended overall inflation rate below expectations.
Therefore, if inflation comes down quicker than current estimates, we should see an increase in risk appetitive for stocks, real estate, and other risk assets.
After all, the net present value of future cash flows increases when interest rates go down. So does the relative desirability of risk assets. When government bonds are high, it crowds out capital that would have gone to private companies.
The Bottom Has Been Reached For Stocks In This Cycle
Of course, nobody knows how well risk assets will perform in the future. One of the biggest challenges an investor has is figuring out exactly how much existing beliefs are baked into asset values.
However, the new Series I Bond interest rate makes me more confident the worst is over. In other words, 3,577 was most likely the bottom of the S&P 500 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 going to be buying under 3,700 and nibbling under 3,800 as well.
Chances are higher now the Fed will begin to telegraph a moderation in future rate hikes within the next six months, if not by year end.
Time To Make Low-Ball Real Estate Offers Now
The other implication of a lower Series I Bond rate is that you want to strategically make low-ball real estate offers for 10% – 20% off now BEFORE mortgage rates start coming down by 2-3% by April 2023.
That's right, the Series I Bond interest rate offer is literally telling us mortgage rates will start heading south 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.
If you get a new purchase mortgage in the short term, strategically, it is better to get an ARM at a lower rate and hopefully a lower fee. The reason why is because you expect to refinance to a lower rate within the next 12-24 months.
Winter is my favorite time of the year to hunt for real estate deals. Anybody listing during the holidays and difficult weather conditions is likely more motivated than those listing during the spring. Thus, if you can get a panic seller to sell for 10-20% below April 2022 comps, I think you are going to do great.
You don't have to buy an entire property and take on debt either. Instead, you can buy a public REIT, a private real estate fund, or invest in individual private real estate deals to more slowly leg in.
Personally, I like Fundrise for its focus on investing in Sunbelt single-family and multi-family real estate. Fundrise's CEO and investment committee have always been very cautious and opportunistic. The firm is looking for deals now before interest rates decline again.
For example, here rental-income property deal Fundrise purchased recently in Georgia. I'm confident Fundrise got a good deal compared to prices earlier in the year. It's focus on Sunbelt real estate and income is what I want as a San Francisco real estate owner.
Stay The Course With Your Investments
Remember, risk assets are priced off risk-free rates. And the Series I Bond can be considered a type of risk-free rate, albeit not the best one given the purchase limit per person. The best risk-free rate is the 10-year Treasury bond yield.
Higher Treasury bond yields crowd out private capital. Personally, I gladly bought Treasury bonds yielding between 4.2% – 4.6% at various durations. However, as Treasury yields come back down, the attractiveness of risk assets goes back up.
If you own stocks and real estate, I wouldn't sell now. If you aren't willing to nibble on risk assets now, I would at least hold on. Feel better knowing we are unlikely to fall into a similar abyss like the one during the 2008-2009 global financial crisis.
What's great about writing on Financial Samurai is that I can revisit my thesis in six months and see whether I was right or wrong! I understand most people aren't willing to publicly make forecasts out of fear of looking like an idiot.
However, I'm used to feeling and looking like an idiot, so it doesn't matter! What matters is that I take action based on my beliefs. Otherwise, many of my investing thoughts will be rendered pointless.
Series I Bond Rate 2023 Update
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. In other words, the Series I Bond rate is over.
[Fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]
Readers, 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?
Disclaimer: 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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