Why I Am Not Buying I-Bonds: Are TIPS Better?
In recent years, government-issued bonds have garnered significant attention as investors search for safe-haven investments in an uncertain economic landscape. Among these, I-Bonds (Inflation Bonds) have emerged as a popular choice due to their unique structure designed to protect against inflation. However, while I-Bonds have their merits, I have decided against purchasing them. Instead, I’ve opted for Treasury Inflation-Protected Securities (TIPS). Here’s why I believe TIPS may offer more advantages than I-Bonds for my investment strategy.
Understanding I-Bonds and Their Appeal
I-Bonds, issued by the U.S. Department of the Treasury, are designed to protect savers from inflation. Their unique mechanics include a fixed interest rate and a variable rate that adjusts every six months based on changes in the Consumer Price Index (CPI). This structure makes I-Bonds particularly appealing during periods of rising inflation.
Some other key features include:
- Tax Benefits: Interest earned on I-Bonds is exempt from state and local taxes, and federal taxes can be deferred until redemption.
- Low Minimum Investment: You can purchase I-Bonds for as little as $25, making them accessible for most investors.
- Safe Asset: Like all U.S. government securities, I-Bonds are backed by the full faith and credit of the U.S. government.
While the initial allure of I-Bonds is evident, there are several factors that have led me to steer clear of them.
Reasons for Not Purchasing I-Bonds
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Purchase Limitations:
I-Bonds come with an annual purchase limit of $10,000 per individual (plus an additional $5,000 if you use your tax refund), which significantly restricts larger investors looking to allocate a more substantial capital amount. -
Liquidity Constraints:
I-Bonds have a minimum holding period of one year, and if you cash them in within five years, you forfeit the last three months of interest. This lack of liquidity can be a disadvantage for investors who may need access to their funds more quickly. -
Interest Rate Variability:
While I-Bonds are tied to CPI, the fixed rate component is set when you buy them and doesn’t change. Therefore, if inflation decreases or remains stable, the appeal of I-Bonds might diminish, as existing holders won’t benefit from any increasing rate environment. - Limited Growth Potential:
Given the bond-like nature of I-Bonds, their overall growth potential may not match that of other investment vehicles, particularly in a rising interest rate environment where other assets may appreciate more significantly.
Why TIPS Might be a Better Choice
Treasury Inflation-Protected Securities (TIPS) stand out as a strong alternative to I-Bonds for several reasons:
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Higher Purchase Limits:
TIPS can be purchased in larger increments, allowing for more substantial investments without the annual cap restrictions that I-Bonds impose. -
Inflation Protection:
The principal value of TIPS adjusts based on inflation, ensuring that as inflation rises, the value of my investment grows correspondingly. This feature provides a hedge against inflation but also allows for greater potential gains over time. -
Liquidity:
Unlike I-Bonds, TIPS are marketable securities, meaning that they can be bought and sold in the secondary market at any time without a holding period. This flexibility makes it easier to manage investments according to personal cash flow needs. -
Consistent Yield:
TIPS offer a fixed interest rate that is paid on the adjusted principal. This provides a reliable income stream that can be appealing for income-focused investors. - No Purchase Limits from the Market:
TIPS can be purchased in any amount in the open market, subject only to the price of the security, allowing investors to align their holdings more closely with their financial goals.
Conclusion
While I-Bonds offer unique advantages such as tax considerations and inflation protection, the limitations in purchase amount, liquidity, and growth potential make them less attractive for my investment strategy. In contrast, TIPS provide greater flexibility, a reliable income stream, and no restrictions on the amount that can be purchased, making them a more suitable choice for inflation protection in a diversified portfolio.
As always, each investor must consider their own risk tolerance, goals, and investment timeline. For my financial strategy, TIPS serve as a better fit, allowing me to navigate the complexities of inflation while ensuring accessibility to my invested funds.
LEARN MORE ABOUT: Treasury Inflation Protected Securities
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Thanks for watching! Here are some follow-up videos:
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This makes zero sense. Today, you'll get 6.89% on I-bonds for the next six months. If you cash out after 15 months, you'll have 12 months of taxable gains (%6+) minus the Fed tax rate on only the gains, at no risk. You absolutely cannot guarentee the stock market movement this year or interest rate drop over one year, period. Guaranteed 12 months of 6% minus the fed gains tax of that profit CANNOT be a negative number. You cannot lose money today if you keep the bond for at least 15 months. Why on Earth are you saying its guarenteed negative real return at 15 months? Please show me the 15 month math of a $10k investment in today's I-bond (6.89%) in 2023-24 that becomes a loss.
Why I’m not buying IBonds? I bought i bonds for myself…no problem. While creating an account for my wife the primary account numbers were misplaced and my local bank rejected the account. As a result we were required to get her signature certified. We went to three branches of the same bank and all the branch managers told me “they don’t do that”. A letter to the bank (TFS) CEO got my wife’s signature certified. Now it’s been weeks waiting for Treasury Direct to respond. I’ve missed out on the highest rate and in a few more weeks we’ll miss the chance to buy IBonds before the end of 2022.
I wonder why my financial advisor at my credit union did not tell me about any of this.
FIPDX has been falling for the whole year, while I Bonds were paying 9.62% and now 6.48%.
How TIPS can be called “inflation protected” if they become cheaper and cheaper during such high inflation…
This has to be some of the dumbest advice ever given in a financial youtube video. It is so terrible that I for a moment thought he was trolling. I-bonds are among the best investments currently available to retail investors there is not a zero-risk investment that even comes close. TIPS???? Are you serious? Who in their right mind would prefer 2% over 9.62%? FIPDX is down -13% YTD and VAIPX and even worse -17% YTD and they yield way worse than I-bonds. This kid has no idea what he is doing, he probably lost all his money in Bitcoin and now considers himself a financial expert. Smart people maxed their I-bonds, parked money in T-bills ladders and their emergency money in HYSA. Once the FED starts lowering interest rates we will be buying stocks with both hands.
The video missed a key consideration around interest rate / duration risk that can significantly impact the value of TIPS. Increasing inflation is often followed by policy driven interest rate increases which can dramatically reduce the market values of longer-term TIPS / TIPS funds and offset the inflation protection. A great benefit of I Bonds is they do not really carry duration / interest rate risk. In an increasing rate environment, you can always cash them out and reinvest in higher rate nominal bond without incurring market losses. For example, the 15+ year PIMCO TIPS ETF (LTPZ) is already down 33% this year due to increasing rates, despite the highest inflation in 40 years
Terrible advice. I-bonds don't have to be long term investments. The 9.62 from last reset, and the 6.48 for the current reset equates to an annualized yield of 8% . If for example the next rate would drop to 2%, which it won't, you can hold the I-bond for 3 months, and that will be the penalty. An awesome interest rate guaranteed, buy as many as you can. I bought 7 for me and my wife.
For large emergency funds, ibonds are a decent place to sit
Even if you buy I bonds and cash prior to 5 years you forfeit 3 months. At 9.62 you'll still be getting 7.22 which isn't bad for a short term investment.
Diversity is the key.
I've owned I bonds since 2002. It's been a horrible investment yielding less than 3%
It’s my understanding that tips are based on the change in the inflation rate, not the inflation rate itself. Correct?
Don't you lose the state and local tax exemption benefit if TIPs are held in a traditional IRA/401K? Isn't the interest being reinvisted and then the 401k withdrawals subject to all taxes?
Man, what are your credentials?
Tips the value of the bond can go down so aren’t the overall value down 13% even though you get at 7% interest rate but your total value went down 13 percent for explain that
I spent an hour on the GOV website trying to enlist in I Bonds. It errored out so badly, I just gave up. Never mind. I think it's a good deal at the current rate being offered. If you can get it to take your money, that thing will double in value in 10 years if you do absolutely nothing. Put your money away in a safe place like this where you can't spend it easily. Remember, "it's your money until you give it away".
Absolute nonsense 8%+ for 1 year with virtually no risk is a great investment in this high inflation environment
I am 76 years old and was thinking to buy a savings bond for my daughter. I am old age but I think is better to buy a bond than my account in a bank who paying nothing for my savings.
Agreed but no harm in having some I Bonds. DCA in a mix of assets. Index funds and things of that nature in a 401K, pick your long term favorite equity in a Roth/IRA. Looking into TIPS.
hi Nick, thanks for the thorough explanations here. I am questioning the tips funds however, since unlike holding to maturity with a direct buy of say a 5 yr tip, where u at least get your principal back, those funds are risky, no? they are seriously down for the yr for ex.
However Tips you gotta pay fed taxes yearly I bonds you don't until you redeem them.
For right now I bonds are great. They are a lot better that the negative 22% my IRA acount is doing.
I'm still buying stocks but have also picked up I-bonds to take advantage of the current rates. I don't plan to keep long and will likely sell when the one year is up. Sure, I'll lose 3 months gains but what I do make is still better than the current market and I can use that money for my son's college tuition. What am I missing?
why not sell puts on spy to try to get the stock market cheaper
Sorry but I cannot see the advantage in buy Tips over 5 yr CD's or MYGAs which are paying close to 5%. Please let me know what is the allure of TIPS. If we enter a deflation era , yes I see some attraction, but the USA economy never seems to do that. I live in Japan where we have had something close to deflation, but they call it stagflation. At this time Japan is beginning to have some inflation for the first time in decades. Please advise .
Great analysis! Where do you learn this stuff???
Thanks Nick. Great explanation of the differences between TIPS and I-Bonds.
I wouldn't follow this guy's advice
Totally agree on your points for younger people. For us in retirement ibonds are a great way to hold some cash, which we will use over the next 1-2 years. We don’t want to sell stocks in a down market., which otherwise we need to do. We already have TIPS as part of our bonds.
I am 67 yr old. You I believe. You lost me 4 pages ago.
9.62% iBond is a good 1 year rate for 10k.
Thanks for making this video. Good info that I'm not really hearing elsewhere.