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I-Bonds: Forgotten Stepchildren Of Guaranteed Inflation Protection

May 04, 2016 2:44 PM ET9 Comments
Peter Hofmann, CFA profile picture
Peter Hofmann, CFA


  • I-Bonds provide a unique combination of inflation protection, liquidity, and tax advantages.
  • They are the best way to guarantee protection of principal against inflation.
  • Worried about deflation? I-Bond "real" returns are enhanced by deflationary periods.

If there is one investment that should be at the core of any long-term savings plan, it is I-Bonds. The U.S. Treasury began issuing I-Bonds in 1998, but they have remained below the radar; as of January 2016, only a total of $117 billion of these bonds were outstanding, less than 1% of the Treasury's total debt. Few advisors seem to recommend them, possibly because they cannot be held at any financial institution and thus do not generate any commissions or fees. Yet I-Bonds provide a unique combination of protection against inflation, almost complete liquidity and significant tax advantages.

The mechanics of I-Bonds are a slightly complex, but worth exploring in more detail. The bond face amount (or principal) is fixed at the time of purchase. This is similar to most newly issued bonds. However, unlike regular bonds that decline in value when interest rates rise, I-Bonds can always be redeemed at full principal value plus accumulated interest (beginning 12 months after they are bought and subject to a modest interest penalty during the first five years.) In this respect, they are akin to bank Certificates of Deposit.

I-Bonds pay interest every six months for 30 years. Interest is not paid out in cash, but is added to the principal value of the bond. Thus, interest compounds semi-annually and all interest income is automatically protected against inflation until the bonds mature or are redeemed.

The interest rate on I-Bonds changes every six months. Each bond pays a rate that combines 1) a fixed rate that does not change for 30 years and 2) a rate equal to inflation (change in the CPI-U index). Here is an example of how the rate is calculated.

The fixed portion of the interest rate is thus a "real" rate over and above inflation. However, because this "real" rate compounds, the effective "real"

This article was written by

Peter Hofmann, CFA profile picture
I am a financial advisor and former financial executive with extensive experience in the insurance, banking and asset management industries.

Analyst’s Disclosure: I am/we are long I-BONDS AND TIPS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

Peter Hofmann, CFA profile picture
Thanks for the comments.

LBDGI, yes federal taxes are due on the interest when you redeem the bonds, unless you qualify for the education exemption. You defer taxes until you redeem, but you don't avoid them. Aida, I am saying that if you want guaranteed inflation protection, I-bonds provide that. You can get higher current yields in the market, but if inflation increases you may lose purchasing power.
Jareth_King profile picture
I buy a set amount every year. Glad the fixed rate stayed at .1%
The interest rates are pitiful. Might as well stuff cash in your matress
Jareth_King profile picture
And gain nothing at all. If it's free cash, do something with it. If Series I isn't your thing and your real low risk, convert the cash into some silver or gold.
aida2003 profile picture
Are you saying that I-Bonds are worth buying today at 0.10% fixed rate + 0.08% inflation?
Peter Hofmann, CFA profile picture
Thanks for your comment. You can redeem I-Bonds for cash any time after 12 months. If you redeem before 5 years are up you give up 3 months of interest. After that, no penalty. See Treasury Direct website (link in the article) for all the details.
rfortin profile picture
Great article. so for a newby like myself can you explain something please? When can one begin to receive cash flow from these since you said interest is payed back as bond principal? Five years?

I cashed out some I-Bonds last year and all the accumulated interest was taxed on the federal return. So I don't believe the interest is paid back as principal. Interest is only added back for subsequent semi-annual interest calculations. All the interest is federally taxable unless I am mistaken.
TAS profile picture
True story.

I bought EE and I Bonds with spare cash (about $500/month) from 1982-2003 when there was a guaranteed 4% interest floor.Now, I collect about $2000+/month from 2012-2033 (and probably more if interest rates go up with the I Bonds).

It turned out to be a perfect annuity for me - and I never missed the money to begin with.

I still had plenty of cash for stocks, bonds and rental real estate.
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