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I Savings Bonds Can Hedge Against Inflation

Savings bonds are an old-school money strategy, but one sort in particular is having a moment right now, with a 7.12 percent interest rate locked in until April.

Inflation-protected Series I savings bonds have attracted increased interest from savers and investors due to a failing stock market and inflation rising to 7.5 percent in January, the highest year-over-year gain in four decades. Collin Martin, director of fixed income at the Schwab Center for Financial Research, said, “I bonds haven’t made headlines in years.”

“And then when you see a rate at 6%+, you suddenly see a lot of interest from investors, so we’re getting a lot of questions there.”

“Any secure investment that provides a solid return is in high demand,” says Bridget Jones, creator and coach of Smart Sister Finance, a financial education resource for women. “Inflation fears make assets like Series I bonds appealing.”

Series I savings bonds are suddenly delivering a guaranteed return in accordance with conservative projections of what investors might anticipate from the stock market based on its performance over the previous 50 years, with an interest rate over 7% until April 2022. Here are three factors to consider when deciding if a Series I savings bond is right for you, according to three experts.

What Are Series I Savings Bonds?

Savings bonds issued by the federal government aren’t known for their high yields. Series I savings bonds, on the other hand, are linked to the rate of inflation, thus they are a good investment right now.

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“A 7.12 percent yield is much above what a CD of any duration can offer at this juncture,” Jones adds, referring to certificates of deposit, which keep your money in an account for a fixed amount of time. CDs are now yielding yields that are typically less than 1%.

Buying a Series I bond also comes with a sense of security. Because it’s backed by the US government, it’s for investors searching for safety and inflation protection, according to Martin.

I bonds earn interest for 30 years, as long as you don’t cash them in before then. You need to hold them for at least one year, and if you redeem them after less than five years, you forfeit the previous three months of interest. That means the bonds make the most sense if you can afford to put the money aside long-term. The Treasury Department offers a savings bond calculator on its website where you can run the numbers to see how much you can earn over time.

i saving bond

The bonds are particularly appealing to investors searching for a safe investment that may help them keep up with inflation. “We’ve witnessed unprecedented inflation levels, and I bonds are inflation-protected, making them a popular choice for investors looking to safeguard their buying power in the future,” says Kevin Matthews II, M.S., a former financial advisor and author of “Starting Point: How to Create Wealth That Lasts.” “Given our financial situation, this protection has been top of mind.”

Series I Savings Bonds Rates Compared to Inflation

Savings bonds of the Series I series adapt to keep the principal dollar value from degrading due to inflation (thus the I in the name). The bonds, which were initially issued in 1998, are divided into two sections:

  • Base rate: Fixed for the life of the bond
  • Variable rate: Changed regularly, depending on the inflation rate

These rates are added together to form the composite rate, which is now 7.12%. According to Matthews, historically, inflation has had a negative influence on bonds since it decreases the future value at maturity. “I bonds deal with inflation by basing their interest rates on the consumer price index,” he explains. “For example, if inflation rises to 7%, I bonds will change their rate to pay just a little bit more than that to tempt investors.”

When Will Series I Interest Rates Update and How Will It Change?

According to Jones, the variable portion of the rate, which can alter every six months, accounts for the majority of the current return on Series I savings bonds.

“The Series I bonds that are currently being issued have a fixed interest rate of 0%,” says Jones. “All of the 7.12% interest rate currently being offered is based on, and meant to compensate for, the current inflation the U.S. economy is experiencing.”

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The next adjustment period begins in early May 2022, after the Federal Reserve is scheduled to begin raising interest rates in March to help keep inflation under control. According to Jones, if the Fed’s efforts are effective and interest rates fall, the interest rate on Series I savings bonds will certainly decline.

“While the inflation rate is increased every May and November, the interest rate on your bond will be updated every six months, based on the issuance date,” Jones explains. “If the Series I bond return becomes less appealing over time as interest rates on conventional savings accounts or CDs climb, you can sell the bond after one year if you choose to. Just keep in mind the penalty for selling before five years.”

Little you should plan for lower yields in the future, maybe as low as 1% in a few years, Martin thinks there’s a strong possibility you’ll be able to enjoy the higher rate for a while longer. “Given the fact that the next reset is in two months,” he adds, “it’s likely that it’ll reset at another high level: 7%, 6%, 8%.”

How Series I Bonds Compare to the Stock Market

If you’re wanting to diversify your portfolio in the midst of a slow stock market, Series I bonds might be a secure long-term investment with a predictable return.

Long-term investment in low-cost index funds is the greatest road to financial freedom for most people. Experts advocate index funds because they help you diversify your portfolio rather of relying on the ups and downs of a single stock, bond, or investment, and they have lower costs than other funds, allowing you to keep more of your gains.

Series I bonds’ 7.12 percent return rate brings them closer to standard stock market returns, which typically average about 10% yearly over time. And, because bonds are expected to provide a similar yield for the foreseeable future, some investors may want to allocate a portion of their portfolio to this more reliable option.

Do Series I Bonds Make Sense for You?

You’ll want to think about a few factors before deciding whether I bonds are a suitable fit for your portfolio, including whether you can wait five years to avoid an interest penalty.

“If you’re an investor who looks for safety and traditionally uses CDs or money market funds, considering an I bond is a logical answer,” says Martin. “It’s diversification for your diversification. You hold a money market fund or CDs or Treasurys to help offset the risk elsewhere, and this is another piece of that puzzle.”

i saving bond

They might also be beneficial if you need a break from the stock market. “If you’re upset with the market today and don’t know where to put your money but want to be secure,” Martin adds, “it’s almost like a set it and forget it sort of investment.” While you will need to set them up separately from your other accounts, this might be beneficial. “Knowing that you’re shielded against inflation if it continues to climb, you kind of forget about it.”

Because of the $10,000 cap, the I bond isn’t a good choice for high-net-worth investors, according to Martin. “It’s not going to have as big of an impact on a portfolio as it would for someone who has $10,000 in their portfolio,” he says, adding that the question is whether it’s worth your time to register a Treasury Direct account and invest a tiny amount.

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If you want immediate results, it may not be the best option. “Interest is added to the principle, and then you get that lump sum at maturity or when you want to redeem,” he explains. “For many retirees, the semiannual payments from their bond holdings are their only source of income.”

How to Buy Series I Bonds

To purchase a Series I bond, go to TreasuryDirect.gov. It’s important to keep in mind that there are certain limitations.

An electronic bond can be purchased for as little as $25. Paper bonds must be acquired in quantities of $50, $100, $200, $500, and $1,000 if you desire them.

You can only buy $10,000 in electronic bonds every calendar year, but you may use your tax refund to buy another $5,000 in paper bonds, bringing your total to $15,000 per calendar year per Social Security number, according to Jones. “Even with these purchasing ceilings and restrictions, the Series I Bond is an appealing option to earn a high interest rate on a really safe investment sponsored by the United States government,” she adds.

 

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