Inflation-Protected Government Bonds; Now? How?

Categories : Financial, News
June 1, 2022

Recently, on economist Larry Kudlow’s popular Fox Business Channel TV program, he referred to a government bond that would yield nearly 10%. That rate is an eye-opener in these days of low-interest rates. He was referring to U.S. Government Series I Savings Bonds, or simply I-Bonds, in which the I stands for inflation protection. With a recent surge in actual and reported inflation, I-Bonds have logically been receiving increasing attention.

I-Bonds pay interest in two ways. First is the fixed interest portion, which has been pegged at 0.00% for some time. This has been a disincentive for income investors of any age. The second interest payment is variable and changes with inflation. Only recently has the inflation protection rate been raised high enough to rekindle interest among buyers. For the 6-month period that began May 1, 2022, I-Bonds’ variable interest portion is set at 4.81% for 6 months. Should that rate stay steady through the November 1, 2022, adjustment, the annual payout rate would be 9.62%.

I-Bonds can be purchased in paper form, electronic format, or a combination of both. These purchases are generally made through an account set up by the investor at the government website Also available is an option to purchase I-Bonds with income tax refunds, up to a $5.000 limit per person per year. These I-Bonds can be purchased in any amount up to that limit.

Logically, above-market interest rates carry some restrictions, and I-Bonds pose no exception. The most obvious is the variable-rate adjustment every 6 months, which could drastically reduce payouts when inflation subsides, and the variable portion is lowered. Next is the holding period, as the minimum hold is one year. Between 1 and 5 years of ownership, the penalty for selling is forfeiture of 3 months of interest. After 5 years, I-Bonds may be sold back to the Treasury without penalty, but all interest paid or credited during the holding period will be taxable immediately.

Favorability of I-Bonds to any individual is dependent on actual circumstances and their personal inflation outlook. In the short term, current rates are very attractive. Should inflation rates return to low levels of recent years, I-Bonds yields will fall dramatically.

Alternatively, Treasury Inflation-Protected Bonds (TIPS) may also be purchased by individuals, and annual limits are very high. TIPS are marketable and can be bought and sold at will. While current TIPS also carry a fixed interest rate of 0.00%, inflation adjustments are applied monthly to their principal value, thereby adjusting the market price for inflation. Ask your financial advisor for a further explanation.

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