Here's Why You May Not Want to Buy Bonds After June 1st

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  • The U.S. is at risk of defaulting on its debt if the debt ceiling isn't raised.
  • It's questionable whether bonds issued after June 1 will be considered legitimate.

The U.S. has a crisis on its hands. If lawmakers don't agree to lift the debt ceiling, the country will be unable to fulfill its financial obligations, which include paying interest to holders of Treasury bonds and other government-backed securities. And Treasury Secretary Janet Yellen has confirmed that the nation risks defaulting on June 1 in the absence of a debt ceiling hike.

Now seeing as how the U.S. has never defaulted on its debt before, some people aren't so concerned about the current crisis and expect that the debt limit will indeed get lifted. But financial guru Suze Orman warns that you may not want to purchase I bonds after June 1 for one big reason.

You don't want to end up with a bum investment

When you buy stocks and other assets in your brokerage account, there's no guarantee that they won't lose value. But bonds that are issued by the U.S. Treasury are a different story, since they're backed by the full faith and credit of the country itself.

Meanwhile, I bonds have, for the past year or so, been touted as a solid investment because they're not only backed by the Treasury, but pegged to inflation. And since inflation levels are so high these days, I bond interest rates are high.

In fact, I bonds issued between now and Oct. 31 will have a 4.3% interest rate attached to them. That rate then has the potential to change in November, depending on what inflation levels look like at the time.

The reason Orman is cautioning people to hold off on buying I bonds is that she's worried that if the U.S. does default on its debt but continues to issue I bonds anyway, the Supreme Court will come in and dictate that the issuance of those bonds was unconstitutional. And as such, she worries that bonds purchased under those circumstances will be considered invalid or worthless. She's also not convinced that bondholders will be able to get their money back. So unless the debt crisis is resolved prior to June 1, it may not be the best idea to buy I bonds after that point.

Other options to look at

The reality is that while I bonds are paying fairly generously right now, if you find the idea of purchasing government securities too risky, you could put your money into a certificate of deposit instead. Many CDs are offering a rate that's comparable to what I bonds are paying through late October, and you don't have to commit to more than a one-year term to get it.

Of course, if you want to keep your money liquid given the uncertainty that abounds, you might opt to just keep more cash in a regular savings account. Some high-yield savings accounts are paying close to or upward of 4% right now. And while those rates could change on a whim because they're not locked in, neither is your money.

All told, having the U.S. default on its debt would be downright catastrophic, so ideally, that scenario won't come to pass. But if you've been thinking about buying I bonds, you may want to sit tight a bit longer and wait to see how things play out. The interest rate on these bonds isn't changing for months, so you can afford to hold off and see what happens.

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