Investments

EMEL AKAN is a senior reporter for The Epoch Times in Washington. Previously, she worked in the financial sector as an investment banker at JPMorgan. Emel Akan

Savers Rushing to Inflation Bonds

I bonds that offer inflation protection are paying nearly 10 percent interest

Inflation-protected bonds issued by the Treasury Department have exploded in popularity in recent months as Americans seek safe investments after being battered by the stock and bond markets.

I bonds, inflation-linked savings bonds, currently offer an annual interest rate of 9.62 percent. Investors can purchase these bonds at the current rate through October by creating a TreasuryDirect account. The rate is valid for six months after purchase.

Because of high inflation this year, I bonds have emerged as one of the hottest investment assets of the year. Although these bonds have been around since 1998, interest in them has exploded over the past couple of months, according to Joseph Hogue, an investment analyst and creator of the YouTube channel Let’s Talk Money.

This is because no safe bond investment, especially savings bonds, has ever offered such a high-interest rate, Hogue told Insight.

Google search trends and the popularity of YouTube videos discussing I bonds have been good indicators of their rising popularity, he said.

The Treasury has issued about 10 times more I bonds this year compared to 2021. The rates for I bonds are adjusted twice per year on May 1 and Nov. 1. Interest is accrued monthly and compounded semiannually. If inflation goes higher, so will the yield.

Mel Lindauer, founder and former president of the John C. Bogle Center for Financial Literacy has been a proponent of I bonds since they were first launched 24 years ago.

“I thought they were a no-brainer, but people didn’t seem to be as excited as they are today,” he told Insight. “I was kind of a lone voice in the wilderness.”

There’s no incentive for intermediaries to sell I bonds, so they aren’t frequently advertised.

“Financial advisors don’t want to sell them because they don’t make any money. There’s no commission on them,” Lindauer said, noting that neither banks nor the Treasury Department advertise them.

So I-bonds have been poorly understood throughout the years. Recently, thanks to social media, online forums, and press attention, people have begun to learn about them, he said.

One disadvantage of I bonds is that investors can only purchase a maximum of $10,000 per year. This is because they’re primarily intended for small savers and investors.

According to Lindauer, many investors ignore I bonds because of this constraint, as they have little impact on a big portfolio.

However, there are a lot of ways that people can purchase more than $10,000 per year, he said, noting that people can buy for their family members, trusts, companies, and as a gift. People can also buy up to a total of $5,000 of paper I bonds using their tax refund.

Large investors prefer Treasury Inflation-Protected Securities (TIPS), which also include an element of inflation protection. Investors face no constraints when purchasing TIPS.

Although some people believe that TIPS are better than I bonds, Lindauer said TIPS might cause short-term financial loss because “if you sell prior to maturity, they could be up or down in terms of market value.”

Also, the interest rate on I bonds can’t go below zero. This indicates that I bonds are protected against deflation. TIPS, on the other hand, will have their principal balance fall in times of deflation, making them less protected, according to Lindauer.

The Treasury sets a fixed rate for I bonds, as well as an inflation-adjusted rate based on the change in the Consumer Price Index over the previous six months. The next inflation adjustment will be announced on Nov. 1.

An I bond has a 30-year maturity, so investors can earn interest for 30 years unless it’s cashed. If redeemed prior to five years, the final three months of interest will be lost. After five years of ownership, there’s no penalty for early redemption. However, the federal tax on the interest must be paid in the same year as the redemption.

Even with the penalty, an I bond currently provides “a great return,” according to Hogue. In today’s inflationary environment, “investors are going to need that protection for at least a year.”

Google search trends and the popularity of YouTube videos discussing I bonds have been good indicators of the rising demand.