The CPI-U numbers have finally been released after the delay caused by the government shutdown and we can begin to speculate on the next I-Bond Rate....
What are I Bonds?
Series I Savings Bonds, or I Bonds, are a savings bond issued by the U.S. Treasury. The rate of an I Bond adjusts to track inflation and is guaranteed to never lose value.
First issued in 1998, Series I Savings Bonds (I bonds) are a type of savings bond sold
by the US Treasury. I bonds are designed to guarantee a real
rate of return, regardless of the markets or deflation. To do this, I bonds adjust their rate every 6
months to track changes in the level of inflation as measured by the CPI-U. Even in periods of deflation, I
bonds protect your investment by never losing value. Since an I bond
cannot lose value and they are backed by the US government, they are frequently
chosen by investors over corporate or municipal bonds, which could default or lose
value. With I bonds, you are able to protect your investment
against inflation with the security of savings bonds.
I Bonds and Inflation
Unlike other investments that base their value on companies or government loans,
I Bonds base their rate on the semi-annual change in inflation, which is tracked
by the CPI-U metric. Inflation is the increase in price of goods and services while
deflation represents a decrease in the price of the same goods and services. In
periods of deflation, an I Bond will not lose value as the US Treasury has set a
floor on the rate at 0%. As long as an I Bond has a fixed rate greater than zero,
an I Bond will always increase in real value before taxes. Even if an I Bond
has a fixed rate of zero, the bond will always retain value by matching the changes
I Bond Terms
The US Treasury considers I bonds to be a long term investment.
As such, there are several limitations on I bonds that must be
considered when analyzing your financial goals. I bonds have
a one year minimum hold time in which the bond can not be redeemed. Additionally,
bonds are subject to a 3 month interest penalty if the bond is redeemed within 5
years of the issue date. Similar to other US Treasury Bonds, I bonds
continue to earn interest for 30 years. After that time, the matured bond is worth
the face value plus the interest collected over that time. View a quick
comparison of I Bonds to EE Bonds and TIPS, or view in-depth I Bonds vs. EE Bonds comparison
and I Bonds
vs. CDs comparison.
I Bond Risk
If the recession continues, and if it's severe, you know these investments are safe; they're government-issued. And if inflation jumps, TIPS and I bonds will help you ride out the storm.
Henry K. Hebeler, developer of analyzenow.com
Unlike stocks, corporate bonds, or other equities, I bonds are
low risk investments. The inflation component of the I Bond's rate protects the
earning power of the bond against rises in inflation over time. Even in the event
of deflation, I Bonds are guaranteed to not lose value. Because I bonds
are backed by the federal government, risks associated with the issuer defaulting
are extremely slim (if the government defaults, you have many more problems to worry
about than your I bonds). The biggest risk associated with I
bonds are primarily administrative, such as losing a paper bond or needing to re-issue
a bond with a new owner. In these cases, there are forms available where the bond
can be replaced or reissued. Overall, I bonds are a very low risk investment that
will never lose value and carry tax advantages unlike other investment options.
Page last modified 1/16/2012