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In the current issue of AIER’s Research Reports, Philip Murray explains how inflation-protected Treasury bonds work. The Series I bond (or “I Bond”) provides an inflation-proof version of the old-fashioned U.S. government Savings Bond.
Professor Murray also shows how I Bonds compare to TIPS (Treasury Inflation-Protected Securities). Each investment offers a way to protect the investor from price inflation. Beyond that point in common, the details (and yields) differ between the two inflation-protected instruments.
The “composite rate” on an I Bond has two parts, one fixed and one that varies with the rate of inflation. The first sets the real or inflation-adjusted return on the bonds. The second varies over time in a manner that is intended to keep up with any increase in the price level.
The fixed component is set by the Treasury, and for a given date of issue it remains the same over the bond’s entire 30-year maturity. But I Bonds issued at different times have different fixed rates.
The current fixed interest rate for I Bonds is a meager 0.1%. Why? With short-term interest rates on regular Treasury securities near zero, the Treasury may have little reason to try to offer higher real rates, even for longer-term I Bonds.
Since the fixed rate is now close to zero, the composite rate for I Bonds issued today will depend almost entirely on adjustments for inflation. They thus offer little real return on investment but do lock in money that will maintain value, regardless of inflation.
But there may be a better alternative. At the moment, TIPS not only provide inflation insurance, but also offer higher real rates of return.
As of late August this year, the real yields on TIPS maturing in 5, 10, and 20 years are 1.21, 1.67, and 2.12 percent, respectively. At present, these higher real yields would seem to make TIPS the better bet.
For more on the comparison—as well as details on how to buy I Bonds—please see the latest issue of Research Reports, available free to AIER subscribers or $2 for non-members. Also in this issue:
- I Bonds: Price Inflation Protection
An alternative to old-fashioned U.S. savings bonds is the inflation-proof I Bond.
by Philip R. Murray
- Is This a Good Time to Buy a Car?
It depends what you mean by “good,” but deals and rebates abound for anyone who’s looking for an automotive bargain.
by Jerry Flint
- Employment’s Long, Hard Road
Never in post-war history have such severe job losses accompanied a long recession.
by Kerry Lynch, Senior Fellow
- Ask the Expert: Expensive Joints
The risks and benefits of joint tenancies
Steven J.J. Weisman
To subscribe to AIER Research Reports, please become a Sustaining Member of AIER. Membership starts at just $39 per year.
Already a member? Keep your eye out for the September 21 issue of Research Reports hitting your mailbox or inbox soon.
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