Investors turn to I Bonds as inflation hedge amid tariff worries

[UNITED STATES] As concerns about future inflation mount in the wake of President Donald Trump’s tariff policies, some experts suggest that assets such as Series I bonds may offer a useful hedge against rising prices.

Currently, newly issued I bonds offer a 3.98% annual interest rate through October 31, a notable increase from the 3.11% yield of the previous six months. The I bond rate is linked to inflation, adjusting twice a year based on the consumer price index.

The recent surge in inflation expectations coincides with discussions in the Trump administration about imposing broader tariffs on imports, including potential levies on Chinese goods and automobiles. Economists caution that such measures could push consumer prices higher, making inflation-protected assets like I bonds more attractive. "Tariffs act as a tax on consumers, and history shows they typically lead to higher costs over time," said Mark Zandi, chief economist at Moody’s Analytics.

Nathan Sebesta, a certified financial planner and owner of Access Wealth Strategies in Artesia, New Mexico, noted a "noticeable uptick" in client interest in I bonds and Treasury inflation-protected securities. “While inflation has moderated, the memory of recent spikes remains vivid, and the renewed talk of tariffs has reignited concerns,” he said.

The Federal Reserve's ongoing battle against inflation also plays a crucial role in influencing investor behavior. While the central bank has indicated that rate cuts may be possible later this year, policymakers remain cautious, leaving room for uncertainty. “The Fed’s next actions will largely determine whether inflation remains subdued or resurges,” said Diane Swonk, chief economist at KPMG. This unpredictability adds to the appeal of I bonds as a safe option for cautious investors.

I Bonds as a Solid Strategy

According to certified financial planner Dean Tsantes of VLP Financial Advisors in Vienna, Virginia, purchasing I bonds can be a “sound strategy” as part of a diversified bond portfolio. However, some investors have favored high-yield savings accounts, certificates of deposit (CDs), or Treasury bills due to higher interest rates.

As of May 7, the best high-yield savings accounts are offering an average interest rate of 4.23%, while the top one-year CDs offer rates of up to 4.78%, according to DepositAccounts. Treasury bills also continue to provide yields above 4%. However, unlike I bonds, these alternatives do not adjust for inflation, meaning their real returns could be eroded if inflation picks up. "In an inflationary environment, locking in a CD at today’s rates could leave investors with less purchasing power in the future," warned Tumin. This trade-off has prompted some investors to diversify with inflation-linked options.

The future direction of inflation will largely depend on the Federal Reserve’s actions.

Understanding How I Bonds Work

I bond rates are composed of a fixed rate and a variable rate, with the Treasury adjusting both rates every May and November. The variable rate is linked to inflation and remains unchanged for six months after purchase, while the fixed rate stays the same for the life of the bond. The current variable rate is 2.86%, which could rise if inflation accelerates, while the fixed rate stands at 1.10%. This fixed rate is especially attractive for long-term investors, according to Ken Tumin, founder of DepositAccounts.com.

Prior to November 2023, the fixed rate on I bonds had not exceeded 1% since 2007, according to Treasury data. The recent increase reflects the Treasury's response to ongoing inflation concerns. "With a 1.10% fixed rate, combined with inflation adjustments, I bonds are competitive with other low-risk investments," said David Enna, founder of Tipswatch.com. For investors who plan to hold the bonds long-term, this could offer decades of inflation-adjusted growth.

Drawbacks of I Bonds

While I bonds offer higher fixed rates and inflation protection, there are some drawbacks to consider, experts warn. For one, investors cannot access the funds for at least one year, and if the money is withdrawn before five years, there is a penalty of three months' worth of interest.

There are also annual purchase limits. Individuals can buy up to $10,000 in I bonds per calendar year online through TreasuryDirect. However, there are ways to increase this limit. One method involves using tax refunds to purchase up to $5,000 in paper I bonds annually, effectively raising the total purchase limit to $15,000 per person. "Families looking to maximize their holdings often use this approach," Sebesta explained. Still, the purchase restrictions mean I bonds may only play a supplemental role in most investment portfolios.

“There are also tax implications,” Tsantes added. I bond interest is subject to federal income taxes, though investors can choose to defer tax payments until the bonds are redeemed or report the interest annually.