Inflation Indexed Bonds
When Inflation Rates are High, you might be worried about what’s going to happen to your savings. Inflation series bonds are one option to consider. These unique investments have the ability to fight inflation and protect your savings from total devastation.
Types of Inflation Indexed Bonds
There are two different types of inflation indexed bonds issued by the U.S. Treasury one is called the Series I Savings Bond and the other is called TIPS or Treasury Inflation Protected Securities. In this article we will cover only the Series I Savings bonds. See: What are Treasury Inflation Protected Securities (TIPS)? for information about TIPS.
Series I inflation Indexed Bonds-
Inflation series I bonds are purchased at face value. Unlike zero coupon bonds or T-Bills, you cannot buy inflation series bonds at a discount. Instead interest rates paid are based on a sort of complex formula made up of two components. The first component is a base interest rate and it remains the same for the life of the bond. The second component is an inflation adjustment that is calculated every May and November. When inflation is high this will boost the return on your i-Series Inflation Indexed bond. Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond’s composite earnings rate changes every six months after its issue date. Interest is accrued monthly but not paid until maturity or early redemption. The differential is based on the Consumer Price Index.
Early Redemption Options
No matter the maturity of your I-Series Inflation Indexed Bond, you can cash in your bonds at any time after a minimum holding period of 12 months. You get all of the accrued interest, making it a flexible type of investment. Unlike some investments, with multi-year deferred sales charges and penalties for early termination, inflation protected bonds allow you to move into and out of your investment on a year-by-year basis giving you a fair amount of flexibility in your investment strategy.
How To Use I Bonds
When considering inflation series bonds, use them as a hedge against inflation, not an investment, as such. These types of securities are ideal for offsetting the erosion of value on your savings i.e. due to an increase in the Cost of Living due to inflation. Because the interest rate adjusts I bonds are best for periods when you expect inflation to increase but you still want to hold debt instruments rather than inflation hedges like Precious Metals or stocks.
Guest post contributed by Christine Sullins. After working extensively as a FX broker, she is now trying her hand and freelance writing where she can share her insights. Her articles appear on various trading blogs.
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