With stocks and bonds declining in value during the first half of the year due to a myriad of concerns (not the least of which has been the highest inflation rate in nearly 40 years), I Bonds have caught the eye of investors due to their high current interest rate.  However, with anything that receives a lot of attention from the financial media, there is usually more to it than meets the eye.  So, to that end, we wanted to take some time to discuss exactly what I Bonds are, their features and limitations, and other inflation-indexed investments.

What is an I Bond?
An I Bond is a savings bond that the U.S. Treasury started issuing in 1998.  The “I” in I Bond stands for Inflation since the interest rate on the bond is not static, but is indexed to inflation.  The inflation indexing is adjusted twice annually in May and November based off the previous six month reading of the Consumer Price Index (CPI).  As inflation rises, so does the interest rate of the I Bond.

So, is that 9.62% return legit?
Yes and no.  For I Bonds purchased from now until November, the first six months of interest will be at the 9.62% annual interest rate.  So, if you invest $1,000 today, your I Bond will be worth $104.81 in six months.  However, since the interest rate is indexed to CPI, it will change every six months as inflation changes.  It could even be negative if a deflationary period precedes the semi-annual interest rate change.   For example, the annual interest rate in May 2009 was -5.56% and in May 2015 it was -1.60%.  While those are the only times in the past 24 years that the interest rate was negative for six months, investors should know it is a possibility.

Still, 9.62% is 9.62%.  Why isn’t RTD loading up my portfolio with I Bonds?
Ay, there’s the rub.  First, I Bonds are non-marketable securities that do not trade on secondary security markets.  Therefore, we cannot buy them in client accounts like bonds, mutual funds, and ETFs.  Investors must purchase them directly from the U.S. Treasury, either electronically (www.treasurydirect.gov) or paper (only when filing a federal income tax return).  Second, there are limits to the amounts that can be purchased.  If done electronically through the Treasury website, the limit is $10,000 per social security number per calendar year.  If you would like paper bonds mailed to you, the limit is $5,000 per social security number per year.

If I were still interested in buying I Bonds, is there anything else I should know?
Yes.  You cannot redeem your I Bonds within the first 12 months of purchase.  Redemptions within one to five years of purchase come with a three-month interest penalty.  There is no penalty when redeeming after five years.  Also, like all securities issued by the U.S. Treasury, I Bonds are exempt from state and local taxes, but are federal taxable.  Finally, I Bonds have a life span of 30 years.  So, interest will accrue for 30 year or until you cash them, whichever comes first.

I’m worried about protecting my purchasing power with the recent high inflation, but that $10,000 limit is low.  What else is out there?
We’ve been buying Treasury Inflation Protected Securities (TIPS) for our clients’ portfolios for some time now, with 20% of the bond allocation allocated to them.  TIPS are like I Bonds in that they are indexed to CPI (the inflation adjustment is monthly instead of quarterly).  But they offer investors more flexibility since TIPS can be bought on the secondary securities market, with a wider range of maturities, with no penalty for selling at any time, and with no dollar limit.  And while TIPS prices do fluctuate based on market forces, they mature at par value plus the change of inflation that occurred over the life of the bond (just like I Bonds).

In summary, I Bonds can be a great way for investors to preserve the purchasing power of their cash reserves (or gifts to children or grandchildren), especially in periods of high inflation.  However, it is important to know the features and limitations of them to insure they are used effectively and can be converted back to cash without penalty when needed.  So, please reach out to your RTD advisor team to discuss your personal situation and to determine if the use of I Bonds makes sense within the context of your financial plan.


RTD Financial is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.