Treasury I Bonds are savings bonds and can be purchased directly from the U.S. Treasury using the website, treasurydirect.gov. I Bond principal is adjusted for inflation based on the consumer price index for urban areas (CPI-U), so if inflation is 1% annually, the principal increases by 1%. They are currently being issued with a 0% fixed yield, and what is being reported as a 4.6% yield. This is the 2.3% semi-annual adjustment for inflation expected through October 2011, based on the inflation measurement for the month of April 2011.
These are similar to Treasury Inflation Protected Securities (TIPS), with a 0% fixed rate. What is not reported is that if the economy should experience deflation, the holder would have a negative yield as yield on a 0% coupon is derived totally from principal appreciation. For perspective, the historic average for inflation over the past 10 years has been 1.93%. In buying the I Bond an investor must lock in the money at a maturity for three, five or 10 years, as these are the only periods offered. Believing the current low interest rates will persist for any of the noted periods seems a bit outlandish in our opinion. Further, assuming inflation would persist for long periods at levels beyond the noted 10 year average, it also seems risky as the Fed has tools to fight inflation with the target rate as low as it is currently.
We do not recommend buying 0% fixed rate inflation-protected bonds at this time.
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
