Expect a lower rate on November's I bond

After the housing crisis, the Consumer Price Index may not be the truest reading of inflation.Housing is weighted heavily in the index, and accounts for about 42 percent of it. But housing costs may not keep pace with inflation, due to the supply of homes.

"My argument is that we have a tremendous housing supply available. The supply will far outweigh the demand for years," says Donald Cummings Jr., managing partner at Blue Haven Capital in Geneva, Ill.

"When inflation comes, we'll see food prices go up. Energy, precious metals and industrial metals will all go up. But, I don't think we're going to see housing prices go up for 10 years to 15 years," he says.

In other words, because housing makes up such a large part of the index, it might not be the best barometer for the actual price increases that consumers are paying. That means that the I bond won't be doing its job of protecting consumer purchasing power.

Alternative hedges against inflation

There are other investments to consider as a hedge against inflation. Cummings recommends a commodity index exchange-traded fund, or ETF.

McBride also offers some options to I bonds in the current environment.

"Better inflation hedges are longer-term Treasury Inflation-Protected Securities such as the 10-year TIPS. And other asset classes such as dividend-paying stocks, REITs, commodities and other real assets, although there aren't any screaming values in that group," he says. The caveat is that other asset classes can be much more risky than the Treasury-backed I bond.

The I bond can't be redeemed at all during the first year and if you redeem it within the first five years, you forfeit the last three months' worth of interest.

Despite the downsides, the best thing about I bonds is their safety: They can never lose money. The other government-issued inflation hedge, TIPS, can lose money unless they're bought at auction, says Hopwood.

Interest earned on I bonds is also free of state and local taxes. Plus, federal taxes can be deferred until maturity, or interest can be reported yearly. There are also tax benefits to using I bonds to finance education. Those factors, plus an inflation-beating yield guaranteed for 30 years, are worth it for many investors.

News alert Create a news alert for "savings"


Show Bankrate's community sharing policy
          Connect with us

Ask Dr. Don

Use bonds for school, avoid tax?

Dear Dr. Don, This is a bad news, good news situation that I'm asking about. I just received several Series EE and Series I savings bonds. I am the so-called payable-on-death beneficiary on the bonds. My mom, who purchased... Read more


Connect with us