Catching A Break

If you want a safe investment with a reasonable rate of return, as a saver, you just cannot catch a break in today’s interest rate environment. According to Bankrate’s archives, the average one-year CD has yielded less than 1 percent since September 2009 — and under 0.5 percent since December 2010.

Rather than seeking higher yields in longer CD maturities, savers do have more liquid options and there are even types of bonds that perform better than others in a high inflationary environment, including i-bonds and Treasury Inflation Protected Securities (TIPS).

Let’s explore these.

According to Treasury Direct, I-Bonds have an annual interest rate that reflects the combined effects of a fixed rate and a semiannual inflation rate. It is an accrual-type security so interest, if any, is added to the bond monthly and is paid when you cash in the bond.  These bonds are sold at face value.  So, you pay $50 for a $50 bond.

Here are some key facts on i-Bonds:

  • The interest earning period is a minimum of 1 year and a maximum of 30 years
  • There is an early redemption penalty of 3 months’ interest if redeemed before 5 years
  • After 5 years, investors are able to “cash in” their i-Bond and they will receive their principal as well as all interest accrued
  • $5,000 is the maximum a single investor can purchase in any one year
  • The earnings rate is combined in two separate rates.  First, there is a fixed rate which remains the same throughout the life of the I-Bond.  Second, there is a semiannual adjustment based on changes in the inflation benchmark as measured by CPI-U.  The adjustment is made twice every year

Treasury Inflation-Protected Securities are marketable securities, meaning if you don’t want to hold them until maturity, you sell them in the secondary market.  The principal on these bonds are adjusted by changes in the Consumer Price Index. With inflation, principal increases, increasing the value of your bond. 

TIPS pay a FIXED interest rate throughout the term, but the interest rate is paid on the current principal.  Because the rate is applied to the adjusted principal, interest payments can vary in amount from one period to the next. If inflation occurs, even though it is a fixed interest rate the interest payment increases because the payment is based on a higher principal amount.

Here are some key facts on Treasury Inflation Protected Securities

  • TIPS are issued in terms of 5, 10, and 30 years.
  • The interest rate on TIPS is determined at auction.
  • TIPS are sold in increments of $100. The minimum purchase is $100.
  • TIPS are issued in electronic form.
  • You can hold TIPS until it matures or sell it in the secondary market before it matures.

With these investments included in your portfolio, you may be able to catch a break even in an inflationary environment.

To get more detailed information on TIPS and i-Bonds, visit

As always, we are open to your ideas on other investment options that are out there to curb investor risk.


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