U.S. inflation-linked bonds draw saver interest as prices rise

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U.S. inflation-linked bonds

Highlights

The 10-year Treasury yield stands at 4.48% while the 10-year TIPS yield is 2.13%, making TIPS favorable if inflation averages above 2.35% in the next decade.
I bonds purchased through Oct. 31 offer a 4.26% composite rate—including a 0.90% fixed rate—but impose restrictions on trading and redemption within the first five years.
Advisers recommend using TIPS or I bonds mainly for short-term inflation protection, with stocks preferred for long-term growth and purchasing power preservation.

How TIPS and I bonds fit inflation planning

As reported by CNBC, advisers say investors are better served by treating inflation protection as a standing part of financial planning rather than reacting to a single inflation reading. Jacob Cuthbert, a certified financial planner in Washington, Pennsylvania, says inflation protection should not be added to a portfolio simply because inflation is making headlines.

TIPS are U.S. government-backed securities whose principal value rises with the consumer price index, and they pay interest twice a year based on that adjusted principal. At maturity, investors receive the greater of the inflation-adjusted value or the original amount invested, which limits downside from deflation.

The article notes that the gap between a standard Treasury yield and a similarly dated TIPS yield is known as the breakeven rate. With a 10-year Treasury yielding 4.48% and a 10-year TIPS yielding 2.13%, inflation averaging above 2.35% over the next decade would leave TIPS holders ahead.

I bonds also carry the full backing of the U.S. government and combine a fixed rate with an inflation-based rate that resets every six months. Newly purchased I bonds bought between now and Oct. 31 pay a 4.26% composite rate, including a 0.90% fixed rate, but they cannot be traded on the secondary market and carry redemption restrictions in the first five years.

Portfolio impact depends on savings horizon

Advisers in the article frame the choice between cash, TIPS and I bonds around when the money will be needed. For emergency savings or funds needed immediately, they generally favor high-yield savings accounts over market-linked alternatives.

For short-term goals such as a house down payment in the next three to five years, Steve Laipply of iShares Fixed Income ETFs says some inflation protection may make sense, particularly if investors expect elevated inflation over the next couple of years. He says a two-year TIPS ETF can be used to align with that view, while I bonds may also appeal to savers who can leave money untouched for at least a year.

For longer-term investors, advisers argue that inflation hedges play a narrower role because long-dated savings need growth as well as stability. Cuthbert says stocks have historically done more of the heavy lifting in preserving and expanding purchasing power over 10, 20 or 30 years, making late portfolio changes based on the latest CPI reading a weak substitute for long-term asset allocation.

In our earlier article on WTI crude slipping below $80, we explained that oil prices retreated after signs the Strait of Hormuz could reopen, easing near-term pressure on U.S. fuel costs. We also noted that while gasoline prices may respond relatively quickly, the broader impact on everyday inflation can take months to filter through supply chains, meaning headline inflation may cool before most prices actually fall.

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