i-Bonds from the U.S. Treasury

In today’s volatile economy, inflation is on everyone's mind. Will it shrink to the Federal Reserve’s 2% target, or will it continue to climb, or go down then back up again? Regardless, it seems inflation will remain above 2% for the foreseeable future. So, how can investors protect their money? One solid option is Series I bonds, issued by the U.S. Treasury.

Series I bonds are government-issued securities designed to shield your savings from inflation. They offer interest based on two components: a fixed rate and an inflation rate.

• Fixed Rate: This stays constant throughout the bond’s life and is set at the time of purchase.
• Inflation Rate: Updated every six months, this rate adjusts based on the Consumer Price Index for All Urban Consumers (CPI-U), ensuring the bond’s return remains competitive as inflation changes.

As inflation rises, so does the total interest earned on I bonds. For example, I bonds issued between May 1 and October 31, 2024, offer a fixed rate of 1.3%, with a combined interest rate of 4.28%. Compare that to 30-year U.S. Treasury bonds yielding 4.5% as of mid-May 2024—but without any inflation adjustment.

1. Inflation Protection: The primary appeal of Series I bonds is their ability to keep pace with inflation. As prices rise, so does the interest on your bonds, preserving your purchasing power.
2. Low Risk: Backed by the full faith and credit of the U.S. government, I bonds are one of the safest investments available. For risk-averse investors, this is an attractive option.
3. Tax Benefits: Interest earned on I bonds is only subject to federal taxes. You won’t have to pay state or local taxes, making them more tax-efficient than many other investments.

Unlike most other government bonds, Series I bonds are not available through brokers. They must be purchased directly from the U.S. Treasury via the TreasuryDirect website. Each Social Security Number or Employer Identification Number can buy:

• Up to $10,000 in electronic I bonds per year
• Up to $5,000 in paper I bonds (which you can purchase using your federal tax refund)

While Series I bonds have clear benefits, there are a few important considerations:

1. Holding Period: You must hold I bonds for at least one year before you can redeem them.
2. Early Withdrawal Penalty: If you cash out your I bonds within the first five years, you’ll lose the last three months of interest as a penalty.
3. Inflation Risk: While I bonds are designed to protect against inflation, the semiannual adjustments might not always keep pace with rapidly changing inflation rates. There’s no guarantee that returns will outpace inflation every time.

Series I bonds offer a straightforward and secure way to protect your savings from inflation. With the added security of being government-backed, they are a reliable option for long-term investors seeking stability in uncertain times. If you're looking to preserve your wealth while guarding against inflation, reach out to us to explore how Series I bonds could fit into your investment strategy.