The Investment Scientist

Archive for April 2022

When something seems too good to be true, it is often not true. But there is one exception in the financial world: I bonds. 

I bonds are federal government bonds sold to individual investors that pay a very high-interest rate that is linked to inflation. For instance, the current rate is 7.12%. On the first business day of May, the Treasury Department will announce a new rate that will be close to 10%. Some expected it to be 9.62%. Nowhere in the world can one get this high of an interest rate, guaranteed by none other than the US government.

So what is the catch?

Well, there is no catch, but there are some limitations.

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The US inflation numbers for March just came out – it’s 8.5%, another 40-year high. I am afraid that, with the Ukraine War still raging, inflation will get worse before it gets better.

Shortly after the Russian Invasion of Ukraine, the West adopted the “Nuclear Option” of economic sanctions – expelling Russia from the SWIFT system. SWIFT is the payment system that undergirds international trades. Now that  Russia is no longer part of this, it can not sell its energy and agricultural products to the world market. 

How Would That Affect Global Commodity Prices?
Russia is one of the top three exporters of the following commodities: oil and gas, wheat, maize, sunflower seeds, sunflower oil, and fertilizers. On average it accounts for about 15% of world supplies. When these supplies are pulled out of the global market, the price of these commodities will skyrocket as they already have. Since these are basic commodities, and many products use them as inputs. The price shock is going to filter through downstream products as well. 

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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