Staying Fit
Much as I love I Bonds, the government’s inflation-adjusted savings bonds, Treasury Inflation-Protected Securities (TIPS), may be a better option today. They are providing an even better yield over inflation than I Bonds.
I have written about how I Bonds can help you whip inflation and described the basics of investing in them. My family has bought the maximum $10,000 of electronic bonds a year per person from Treasury Direct over the past two years. I Bonds purchased between May 1 and the end of October yielded an annualized rate of 9.62 percent for six months. That consisted of a fixed rate of zero plus the 9.62 percent annualized inflation adjustment.
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The U.S. Treasury recently announced the new rate for I Bonds purchased over the six months beginning Nov. 1: 6.89 percent, consisting of a 0.4 percent fixed rate, plus an inflation kicker of 6.49 percent. This is still quite attractive, given that the average bank savings account yields 0.19 percent, according to Bankrate.com. But TIPS will give you an even better rate than I Bonds, and if you’re worried about inflation, TIPS can help.
TIPS Basics
TIPs are a type of bond issued by the U.S. government. Most bonds make regular interest payments until they mature, at which point investors get their principal back. TIPS also make regular interest payments: The five-year TIPS pays a guaranteed 1.625 percent, plus its principal increases by the inflation rate.
That may not sound like much, but TIPS adjust their principal amount monthly to maintain their real, inflation-adjusted value. For example, if you had a $1,000 TIPS and the consumer price index (CPI) rose 3 percent, your TIPS bond would now have a principal value of $1,030. In the following year, your interest would be calculated on $1,030 rather than $1,000. You’ll never get less than the original principal when the TIPS bond was issued, provided you hold your TIPS to maturity.
While the I Bond bought today gives you a 0.4 percent rate above inflation, that five-year TIPS mentioned earlier yields inflation plus 1.625 percent. That’s 1.23 percentage points in yield more than an I Bond.
