I Bonds: Inflation-Matched Fixed Income
February 16, 2023
Estimated Reading Time: 4 Minutes
What are I Bonds?
How Do I Bonds Work?
I Bonds have a fixed interest rate, which is set at the time the bond is issued and remains the same throughout the life of the bond. In addition to the fixed interest rate, I Bonds also have a variable interest rate that is adjusted every six months (in May and November) to reflect changes in the Consumer Price Index (CPI), a measure of inflation.
The combined interest rate of an I Bond is calculated by adding the fixed interest rate and the variable interest rate. The variable interest rate is based on the CPI, which means that it will increase if inflation rises and decrease if inflation falls. This helps to protect investors from the eroding effects of inflation on their savings.
I Bonds can be purchased online through the Treasury Direct website, in denominations as small as $25 and up to a maximum of $10,000 per Social Security Number per calendar year.
What are the Benefits of I Bonds?
Protection from Inflation
What's the Catch?- The Risks of I Bonds
If you redeem an I Bond after one to five years of ownership, you will forfeit the last three months of interest. This means that if you need to access your money before the five-year mark, you will pay a penalty for doing so.
There are limits on how much you can invest in Series I Bonds each year. The maximum annual purchase amount is $10,000 per person. If you have a large amount of money to invest, you may not be able to put it all into I Bonds.
There is also a limited liquidity to I Bonds. While they can be redeemed at any time after the one-year holding period, there are limits on how much you can redeem in any given year. If you need access to a large amount of your money quickly, you may not be able to get it all out of your Series I Bonds at once.
Though inflation is currently very high, the Federal Reserve is doing whatever it can to reduce it. If successful, the variable interest rate on Series I Bonds will decrease as the CPI decreases. The combined interest rate for I Bonds will not fall below zero. While the variable interest rate on the I Bonds may decrease, the variable portion is unlikely to ever turn negative unless we enter into an extended deflationary period (negative inflation, or prices decreasing), which is not the same as a period of decreasing inflation (inflation increasing at slower rates). Even in this unlikely scenario, the fixed interest rate portion of the I Bonds’ total yield would act as a bellwether, protecting the total yield and value of the investment.
Though I Bonds are available for purchase online, the Treasury Direct website is somewhat antiquated and difficult to navigate. It has a tendency to crash if too many people attempt to purchase I Bonds at once.
Additional Important Information
Important Disclosure Information
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