The Name’s Bond, I Bond
In most cases, inflation is the enemy of investors. There are multiple repercussions when prices rise, most of which are bad.
The Federal Reserve typically looks at raising interest rates to fight inflation. These moves can cause most stocks to fall and sometimes even lead to a recession. Higher interest rates tend to throw cold water on real estate markets. And most bond prices fall as rates go up.
You may have seen the recent headlines about I Bonds where beginning on May 1, 2022 you can buy Series I savings that are expected to offer an annual interest rate of 9.62%. That’s higher than the current I bond interest rate of 7.12%.
This great investment alternative is getting even better not in spite of inflation but because of inflation. The “I” in I bonds actually stands for inflation. The rates for the bonds are set based on Consumer Price Index for all Urban Consumers (CPI-U). Nathan wrote a great blog on I bonds back in November breaking down the calculation.
What Are I Bonds?
Series I bonds are non-marketable bonds that are part of the U.S. Treasury savings bond program designed to offer low-risk investments. Their non-marketable feature means they cannot be bought or sold in the secondary markets. The two types of interest that a Series I bond earns are an interest rate that is fixed for the life of the bond and an inflation rate that is adjusted each May and November based on changes in the non-seasonally adjusted consumer price index for all urban consumers (CPI-U).
The fixed-rate component of the Series I bond is determined by the Secretary of the Treasury and is announced every six months on the first business day in May and the first business day in November. That fixed rate is then applied to all Series I bonds issued during the next six months is compounded semiannually and does not change throughout the life of the bond.
Like the fixed interest rate, the inflation rate is announced twice a year in May and November and is determined by changes to the Consumer Price Index (CPI), which is used to gauge inflation in the U.S. economy. The change in the inflation rate is applied to the bond every six months from the bond’s issue date.
Series I bonds are considered low risk since they are backed by the full faith and credit of the U.S. government and their redemption value cannot decline. But with this safety comes a low return, comparable to that of a high-interest savings account or certificate of deposit (CD). Corporate and municipal bonds, however, can lose value; with this risk comes a higher return.
Series I bonds can be issued in any amount between the minimum and maximum purchase thresholds. The minimum purchase is $25, and the maximum annual purchase is $10,000 per Social Security number. I-bonds can be held for as little as one year or as long as 30 years, but if they are sold after fewer than five years, the holder sacrifices the last three months’ worth of interest.
How to Buy Series I Bonds
U.S. savings bonds, including Series I bonds, can only be purchased online from the U.S. Treasury, using the TreasuryDirect website. You can also use your federal tax refund to purchase Series I bonds (up to $5,000).
If you have $10,000 + your emergency savings shored up, purchasing I Bonds are a great way to keep up with inflation and protect the purchasing power of your money.