I Bonds: The secret weapon for hedging against inflation : Planet Money : The Indicator from Planet Money Savings bonds are known for their low yields and relative safety. However, the recent inflation spike is creating a heightened demand for the Series I Bond. Today, we learn the mechanics of the I Bond and why it might be the hottest investment of 2022.

A secret weapon to fight inflation

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[POST-PUBLICATION CORRECTION: An earlier version of this episode mistakenly stated that I-bonds wouldn’t double if invested from 1998 to 2022. This calculation failed to take into account the fixed interest rate that the investor would have received throughout this period if they bought their bonds in 1998. This reference has been removed.]

SYLVIE DOUGLIS (BYLINE): NPR.

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DARIAN WOODS (HOST): This is THE INDICATOR FROM PLANET MONEY. I'm Darian Woods.

WAILIN WONG (HOST): And I'm Wailin Wong. With inflation at a 40-year high, people with the ability to save or invest are looking for good places to park their money. And the options, frankly, are not looking that inspired right now.

WOODS: Yeah, I mean, at least if you look at the last, I don't know, six months in the stock market, it is a bit of a bloodbath out there.

WONG: Yeah. And even a high-yield savings account is paying under 1%.

WOODS: Not exactly something to shout from the rooftops.

WONG: (Laughter) But there is one security that is virtually risk free and pays a guaranteed return of - are you ready for this? - 9.62%.

WOODS: That's pretty high in this day and age. And it's called the Series I savings bond, or the I bond for short. And it's kind of this obscure underdog of the financial world. Like, think about the trends in finance. We're in the middle of a crypto craze. Last year, it was day trading and meme stocks. Just take the opposite of that - simple, predictable blandness - and then you get the I bonds.

WONG: But with inflation looming over the economy, these long-neglected securities are finally getting their moment in the sun. In January alone, the U.S. Treasury sold $3 billion worth of I bonds. That is triple what they sold in I bonds for all of 2021.

WOODS: So on today's show, we're going to introduce you to the humble I bond, and we'll figure out - is there, like, a catch here? There's got to be a catch, right?

WONG: We'll find out after the break.

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WOODS: Before we get to I bonds, let's talk about the plain old U.S. savings bond. It's been around since the Great Depression, and it's one of the safest, kind of most dull investments that there are.

WONG: Right now, the interest rate on a Series EE U.S. savings bond - that's, like, the traditional, plainest vanilla savings bond - is 0.1%.

WOODS: And I bonds are savings bonds, but with a twist. Their interest rate is tied to the consumer price index. So when inflation goes up, so does the interest rate.

ZVI BODIE (ECONOMIST/PROFESSOR EMERITUS, BOSTON UNIVERSITY): When I bonds came out, I was thrilled. I felt vindicated. I felt, oh, finally.

WONG: Zvi Bodie is a professor emeritus at Boston University. He's a financial economist who has been obsessed with inflation-hedging strategies since the 1970s. And he sees I bonds as a government program that serves the public interest. Basically, the U.S. Treasury is covering the cost of inflation for regular folks.

BODIE: When you teach investments, you start from what is the safest thing you can do. And until I bonds, that was a hypothetical. Didn't exist. But now it exists. And it's the best kept secret in America.

WONG: The U.S. Treasury introduced I bonds in 1998. Here's then-Vice President Al Gore at the big unveiling.

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AL GORE (45TH US VICE PRESIDENT): ...Simply because they are backed by the full faith and credit of the United States government, and they will not lose value if prices rise.

WONG: He doesn't exactly have Zvi's passion, does he?

WOODS: Don't give up your day job, Al Gore.

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GORE: They are also extremely easy to purchase. Families can get these bonds at their banks, and in many cases...

WOODS: Well, you can't get I bonds at your bank anymore, but you could in 1998, when they were still sold on paper. So that's where Zvi went to buy the maximum amount of I bonds for him, his wife and their two daughters.

BODIE: And I said, I want to buy I bond. And they said, what are you talking about? They had - didn't have a clue. And I said, I know that you have them because the Treasury distributed them. So they had to go down into the basement, and they came back and they said, you know what? You're right. We have them.

(LAUGHTER)

WOODS: Well, there you go. Zvi was spreading the word to the banks about their own product. And it does seem like I bonds have just been underappreciated from the beginning, which kind of makes sense. Like, inflation was just 1.6% in 1998, so holding on to your purchasing power maybe wasn't the first thing you're thinking about when you were putting away savings.

WONG: Yeah. And today is, of course, a very different story. So this is a good time to explain how I bonds work. So the interest rate on I bonds is made up of two parts. The first part is a fixed rate set by the government that stays the same for the life of the bond. Right now, that fixed rate is 0%, although it's been higher in previous periods.

WOODS: OK, this - the 0% is a start, kind of. But wait, before you lose interest, the second part of the I bond's combined interest rate is tied to inflation. So when inflation goes up, so does the interest rate.

WONG: The Treasury then puts these two parts together to get a combined interest rate. This combined rate is updated every six months at the beginning of May and November. For the last six months, that rate was just over 7%. The new rate came out on Monday, and it's over 9%.

WOODS: OK, so let's say you put $10,000 in I bonds in November. Thanks to the magic of compound interest, in November of this year, of 2022, your pile of savings will be worth $10,854.

WONG: The interest on I bonds compounds every six months until you cash out, which could be as short as 12 months or as long as 30 years. That's the full maturity of the I bond.

CAIT HOWERTON (LEAD PLANNER, FACET WEALTH): They're honestly a really great investment if you're, you know, if you're needing to hedge inflation for a year to three years.

WONG: Cait Howerton is a lead financial planner at Facet Wealth, so she spends her days giving financial advice to clients. But she's also looking after her own finances, too. And recently, she and her fiance bought a fixer-upper that they want to make some improvements to. So last fall, Cait went on treasurydirect.gov - that's the government website for buying savings bonds - and she bought the maximum amount of I bonds allowed per person - $10,000.

HOWERTON: I didn't want to necessarily put that money into the market and take on the volatility, so I said, hey, let's, let's get some money into I bonds, know that I'm going to make the same amount of interest return as the current inflation rate, and know that I'm not going to lose the buying power of this money that theoretically could have just been sitting in a savings account earning next to nothing on interest from a traditional bank.

WOODS: And when it comes to her own clients, Cait tells them this - they should be prioritizing savings for retirement. They should be paying down bad debt. And they should also have an emergency fund. If they've done all that and they still have cash, and they want to buy something special in the next couple of years, that's when she's like, let me tell you about this thing called the I bond.

HOWERTON: So they're like, wait, like, savings bonds, like from your grandmother? These aren't cool. Why would I want to do this?

WOODS: (Laughter) These aren't cool.

WONG: I only want a financial planner who tells me cool things.

(LAUGHTER)

WONG: Now, there are some caveats to I bonds. Number one, I bonds protect you from inflation. They don't beat inflation. And number two, you're not going to get rich quick off I bonds. There's this $10,000 cap per calendar year, and the earliest you can redeem an I bond is one year.

WOODS: So you know, this is by design. There's less ups and downs. It's a safe investment - you know, even, as we said, a little bit boring.

WONG: Do you feel like you've discovered this uncool thing that's actually cool?

HOWERTON: Yeah, you know, like a trendsetter, like bringing back - what is it - like, wide-leg jeans. But I swear, if Gen Z or the Alphas bring back low-rise jeans, I'm not participating.

WONG: Oh, no, me neither. I can't. I can't go back there, Cait. I can't do it.

HOWERTON: (Laughter).

WONG: Now, Zvi Bodie, professor emeritus - he was buying I bonds back when Cait and I were still spending our allowance on low-rise jeans the first time around. Zvi estimates he has more than half a million dollars of I bonds in his portfolio today.

WOODS: And now, people are finally paying attention to this thing he's been talking about since 1998.

BODIE: You know, what it takes is a bout of inflation. And then, all of a sudden, everybody - their interest perks up.

WONG: Well, not quite everybody.

BODIE: Here's the shocker, Wailin. It's 23 years later. I have an accountant who does my taxes, OK? So I said to my accountant, I'd like to, you know, buy I bonds. He said, what? What are those?

WOODS: (Laughter) The work of marketing this continues for Zvi.

WONG: Lonely road (laughter).

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WONG: This episode of THE INDICATOR was produced by Jess Kung with engineering by Josh Newell. It was fact-checked by Corey Bridges. Kate Concannon edits the show, Viet Le is our senior producer, and THE INDICATOR is a production of NPR.

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