Treasury Inflation-Protected Securities (TIPS)

As stock market volatility heats up, some investors are looking for more stable investments, including Series I savings bonds, or I bonds. Investors have bought more than $11 billion of these bonds over the past six months, compared with around $1.2 billion during the same period in 2020 and 2021, according to the Treasury Department.

The bonds currently pay 7.12%, but are set to deliver a historic 9.62% interest rate beginning in May. They’re backed by the U.S. government and are meant to help protect investors against inflation. However, individual investors are limited from investing more than $10,000 a year in I Bonds.

The rate for the bonds is set by the U.S. Treasury Department and is adjusted every six months based on the Consumer Price Index. If inflation falls, the interest rate on I bonds might start to fall as well. 

The interest is compounded twice a year, and accrues for up to 30 years or until the bond is cashed out, whichever comes first. Although the bonds can be cashed out after a year, there will be a penalty equal to three months of interest if the bonds are cashed out in the first five years. The bonds can’t be bought through brokerage accounts. They can only be bought on the Treasury Department’s website.

“While TIPS have outperformed many other bonds so far this year, a lot of the outperformance is predicated on oil prices remaining high”, said Caleb Silver, editor-in-chief of Investopedia. “However, the oil futures market is signaling that oil could fall as low as $90 per barrel by the end of the summer, which would reduce inflation, and potentially hurt TIPS returns.”

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