Everyone from your grandmother to some snot-nosed kid in first grade is talking about Series I Savings Bonds right now.
“9.62% returns they say!” Oh, this must be one of the greatest free lunches to ever exist. But is it?
Here’s a quick explanation.
Series I Savings Bonds are savings bonds issued by the US government. Unlike most other bonds, I Bonds’ interest rates depend on the inflation rate in addition to a fixed rate.
Each I Bond is guaranteed the initial interest rate for 6 months. However the inflation rate is recalculated every 1st business day of both May and November.
6 months after the issue date, the overall interest rate will reflect the newly calculated inflation rate in addition to the original fixed rate. Interest earned is compounded semi-annually.
For more details you can check out https://en.wikipedia.org/wiki/United_States_Savings_Bonds#Series_I
Well, if you expect inflation to keep staying high, they provide a great hedge against it. However, there is a 3 month interest penalty if you redeem before 5 years. If inflation declines, this could keep you from doing more profitable things with your money. So things aren’t really clear cut.
If you really wanted to go in depth, you could even examine the TIPS spread to get a consensus view of expected inflation. Hint — the market still thinks inflation is transitory. (Yeah, we know, it’s a joke at this point)
To roleplay as an economist, we might say “it’s priced in.”