Inflation Protection Using Series I Savings Bonds
With inflation at levels not seen since the 1980s, investors are naturally searching for sources of safe yield. As financial advisors we’ve been getting a lot of questions from our clients about Series I savings bonds as a way to help protect against inflation. As a result, we'd like to welcome a guest author, Jason Abrams, to provide some information on these savings bonds to our clients and beyond.
What is a Series I Savings Bond?
Series I Savings Bonds are securities sold by the US Treasury direct to individuals. These savings bonds’ returns are based on a fixed interest rate plus an inflation adjustment that changes twice per year. The inflation adjustment makes these savings bonds more attractive during periods of high inflation, which is why they’re attracting a lot of attention this year.
What is the current yield? Is this yield fixed or variable?
Currently, Series I Savings Bonds are yielding 9.62% annually, which is entirely the result of the inflation adjustment to the bonds. This interest rate changes every six months, so the interest rate will be different for bonds purchased after October of this year.
While this yield is very attractive compared to other fixed income investments, we should note that this interest rate can (and has) been much lower for much of the recent past. In particular, since around May 2008 the fixed rate portion of yield has been near zero and the inflation rate has itself been fairly low over the past 7-8 years. We think it is reasonable to expect that inflation and therefore the variable rate will come back down at some point in the future and–given that the fixed rate portion of the yield is currently zero–we don't think the total return rate of close to 10% will persist over time.
How do you buy Series I Savings Bonds?
Series I Savings Bonds can only be purchased directly, via the Treasury Direct government website, TreasuryDirect.gov. They can’t be bought or sold within a brokerage account.
How do I receive the interest on my investment?
The interest on Series I savings bonds accrues: this means that any interest earned gets deposited back into the Series I Savings Bond investment. As a result, Series I savings bonds may be less suitable for retirees and other individuals who are trying to use the income from their investments to pay for their current expenses.
How long do these savings bonds last? Can I get out early?
Series I savings bonds have a 30-year life. An investor can redeem their Series I savings bonds after five years with no penalty, or after twelve months with a penalty of the past three months’ worth of interest.
Are there limits on how much investors can buy?
Yes…Individuals are entitled to purchase up to $10,000 per calendar year electronically through Treasury Direct. Married couples can purchase up to $20,000 total. Additionally, investors may purchase up to $5,000 of Series I Savings Bonds in paper form by using funds from their tax refund.
I’ve heard that bonds go down in price when interest rates increase. How does this affect Series I Savings Bonds?
That principle only applies to bonds that are bought and sold on the open market. (If you own a bond that pays 2% interest but rates go up and there are other bonds that are now paying 3% interest, your bond probably isn’t as valuable if you try to sell it to another investor.)
Since investors redeem their Series I savings bonds directly from the US Treasury, they’re guaranteed to always be worth their face value. The US Treasury returns the initial amount invested plus any interest earned.
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