Should I Invest in Inflation Indexed Bonds?

The question of “Should You Invest in Inflation Indexed Bonds?” depends on your personal situation and the current inflationary environment. If you want to have a low risk investment that will keep up with inflation you might consider investing in inflation indexed bonds.

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-

Should I invest in 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.

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Guest post contributed by Christine Sullins. 

 

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