Series I Bonds for the Win
"Inflation is taxation without legislation." -Milton Friedman
If you took our advice in March and invested in Series I savings bonds, you can look forward to earning record rates over the next year. If you didn't take our advice, there is still time to act.
Today, the Bureau of Labor and Statistics (BLS) announced that the Consumer Price Index (CPI) rose 8.5% in the one-year period through March 2022. The gas price index accounted for more than half of the increase in the CPI number as it jumped 18.3% month over month in March. Much of the inflationary increases are being caused by the ongoing supply chain delays and the war in Ukraine.
Series I savings bonds are a great inflationary hedge. They are unique among bonds as they are comprised of a "Fixed rate" and an "Inflation rate" which combined make up the "Composite rate". The “Inflation rate” component is calculated every six months based on the headline consumer price index change between March and September.
Here's how it works, if you log in to the TreasuryDirect.gov website and buy I bonds today ($10,000 electronic limit per person, per year), you will earn a 7.12% composite rate for the initial six months. You have until the end of April to get the current 7.12% rate. On May 2nd, the Treasury will announce the new I bond rate. We calculate the new annualized CPI inflation rate will be 9.62%. This means that I bonds purchased today will earn 7.12% for the initial six months and then they will earn 9.62% for the following six months. This produces a blended one-year rate of almost 8.4% over the next 12 months. Series I bonds must be held for at least one year, and I bonds redeemed before five years forfeit the last three months’ interest.
The current inflation situation presents a definite win for Series I savings bonds.