Chart of the Week: I-Bonds vs. TIPS—What’s the Best Choice?

Chart of the Week: I-Bonds vs. TIPS—What’s the Best Choice?

May 9, 2022

I-Bonds have gone mainstream—but are they the best option for fixed-income investors bedeviled by high inflation?

As we discussed in our recent primer, I-Bonds are U.S. government savings bonds that pay a rate of interest that adjusts every six months based on inflation. Right now, that rate is 9.62%.

Given that money markets, bank accounts and other savings vehicles are paying less than 1% and even 10-year Treasurys pay just 3% or so, that’s an incredible rate. But I-Bonds aren’t a total solution for the fixed-income portion of your portfolio. There are limits on how many I-Bonds you can purchase ($10,000 in electronic format), where you can buy and hold them, and when you can sell them.

And I-Bonds aren’t the only option for inflation protection. Unlike I-Bonds, Treasury Inflation-Protected Securities (or TIPS) have no annual purchase limit.

TIPS may seem like another obvious buy with inflation as high as it is, but they are not immune to rising interest rates. For instance, Vanguard’s Inflation-Protected Securities fund was down 6.1% year-to-date through Thursday—that’s better than Vanguard Total Bond Market Index’s 10.2% decline, but shareholders who expected the fund to keep pace with inflation have been disappointed.

The chart below compares the yields of these two inflation fighters over the past two decades. The yield on the 10-year TIPS is straightforward. For I-Bonds, we are showing the interest rate available at the time of purchase.

It’s clear I-Bonds deserve a place in your portfolio—if it weren’t for the purchase limits, I’d be hard pressed to recommend any bond other than an I-Bond today. But given the restrictions and the fact that what has gone up (the current yield) can also go down, I-Bonds may serve you best as a rainy day or emergency fund—though it takes time and planning to build that fund up.

Note: Chart shows interest rates at time of purchase for I Bonds from May 2003 through May 2022 and 10-year Treasury Inflation-Protected Security yields from May 2003 through May 2022. Sources: TreasuryDirect.gov and The Wall Street Journal.

This material is distributed for informational purposes only. The ideas and opinions contained herein  should not be viewed as recommendations or personal investment advice. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. Always consult a licensed attorney, tax professional, or licensed insurance professional regarding your specific legal or tax situation, or insurance needs.

For a summary of Adviser Investments’ advisory services and fiduciary responsibilities to our clients, please review our Form CRS here.

© 2022 Adviser Investments, LLC. All Rights Reserved.

Adviser Investments' logo is a registered trademark of Adviser Investments, LLC.