The Secret Weapon to Hedge Against Inflation: Planet Money: The Planet Money Indicator: NPR



SYLVIE DOUGLIS, BYLINE: NPR.

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DARIAN WOODS, HOST:

This is THE PLANET MONEY INDICATOR. I am Darian Woods.

WAILIN WONG, HOST:

And I’m Wailin Wong. With inflation at its highest level in 40 years, people with the ability to save or invest are looking for good places to park their money. And the options, frankly, don’t seem so inspired right now.

WOODS: Yeah, I mean, at least if you look at the latest, I don’t know, six months on the stock market, it’s kind of a bloodbath there.

WONG: Yeah. And even a high-yield savings account earns less than 1%.

WOODS: Not exactly something to shout from the rooftops.

WONG: (Laughs) But there’s a stock that’s virtually risk-free and has a guaranteed return of – are you ready for that? – 9.62%.

WOODS: It’s pretty high these days. And it’s called the Series I Savings Bond, or the I Bond for short. And it’s a bit like this obscure outsider of the financial world. For example, think about trends in finance. We are in the midst of a crypto craze. Last year it was day trading and even stocks. Just take the opposite of that – simple, predictable blandness – and you get the I links.

WONG: But with inflation weighing on the economy, these long-neglected stocks are finally having their moment of glory. In January alone, the US Treasury sold $3 billion worth of I bonds. That’s 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 find out – is there, like, a catch here? There must 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 US savings bonds. It’s been around since the Great Depression, and it’s one of the safest and most boring investments around.

WONG: Right now, the interest rate on a Series EE U.S. Savings Bond — it’s like the traditional, simplest vanilla savings bond — is 0.1%.

WOODS: And I bonds are savings bonds, but with a twist. Their interest rate is linked to the consumer price index. So, when inflation increases, the interest rate also increases.

ZVI BODIE: When my bonds came out, I was thrilled. I felt justified. I felt, oh, finally.

WONG: Zvi Bodie is a professor emeritus at Boston University. He’s a financial economist who’s been obsessed with hedging inflation strategies since the 1970s. And he views I bonds as a government program that serves the public interest. Basically, the US Treasury covers the cost of inflation for ordinary people.

BODIE: When you teach investments, you start with the safest thing you can do. And until I bonded, it was hypothetical. Did not exist. But now it exists. And it’s America’s best kept secret.

WONG: The US Treasury introduced I bonds in 1998. This is then-Vice President Al Gore at the grand unveiling.

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AL GORE: … 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’re also extremely easy to buy. Families can get these bonds from their banks, and in many cases…

WOODS: Well, you can’t get I bonds from 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 himself, his wife and their two daughters.

BODIE: And I said, I want to buy a bond. And they said, what are you talking about? They had–had no idea. And I said, I know you have them because the Treasury distributed them. So they had to go down to the basement, and they came back and they said, you know what? You are right. We know it.

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WOODS: Well, here it is. Zvi was spreading the word to the banks about their own product. And it looks like I Bonds were underrated from the start, which makes sense. For example, inflation was only 1.6% in 1998, so conserving purchasing power might not be the first thing you thought of when saving.

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

WOODS: Okay, this – 0% is a start, sort of. But wait, before you lose interest, the second part of bond I’s combined interest rate is tied to inflation. So, when inflation increases, the interest rate also increases.

WONG: The Treasury then combines those two parties to get a combined interest rate. This combined rate is updated every six months in early May and November. In the last six months, this rate was slightly above 7%. The new rate came out on Monday, and it’s above 9%.

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

WONG: Interest on I-bonds is compounded every six months until you cash out, which can be as short as 12 months or as long as 30 years. This is the full maturity of the I link.

CAIT HOWERTON: Honestly, it’s a really good investment if you, you know, if you need to hedge inflation for a year to three years.

WONG: Cait Howerton is a senior financial planner at Facet Wealth. So she spends her days giving financial advice to clients. But she also takes care of her own finances. And recently she and her fiancé bought a repairman that they want to make some upgrades to. So last fall, Cait went to treasurydirect.gov – it’s the government’s website for buying savings bonds – and she bought the maximum amount of bonds I allowed per person – 10 $000.

HOWERTON: I didn’t necessarily want to put that money in the market and take on the volatility, so I said, hey, come on, let’s put some money in bonds I, know that I’m going to make the same amount of interest back like the current rate of inflation, and know that I’m not going to lose the purchasing power of that money that theoretically could have been sitting in a savings account earning next to nothing on interest at a traditional bank.

WOODS: And when it comes to his own clients, Cait tells them this: they should put saving for retirement first. They should repay bad debts. And they should also have an emergency fund. If they’ve done all that and they still have money and they want to buy something special in the next two years, that’s when she’s like, let me tell you about this thing called the I link.

HOWERTON: So these are savings bonds, like your grandmother’s? These are not cool. Why would I want to do this?

WOODS: (Laughs) That’s not cool.

WONG: I just want a financial planner who tells me cool stuff.

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WONG: Now, there are a few caveats about I bonds. First, I bonds protect you from inflation. They don’t beat inflation. And two, you’re not going to get rich quick with I bonds. There’s this cap of $10,000 per calendar year, and the earliest you can redeem an I bond is one year.

WOODS: So you can compare I bonds to the stock market. So suppose you have savings and put them in an index fund that tracks the S&P 500 in 1998, and leave them there until the beginning of this year. You would have made a 460% return on your investment. That’s more than five times. It’s pretty good. But if you put that money into I-bonds, you’d even be lucky to see it nearly double over the same period. So, you know, it’s by design. There are fewer ups and downs. It’s a safe investment – you know, even, as we said, a bit boring.

WONG: Do you feel like you’ve discovered this uncool stuff that’s really cool?

HOWERTON: Yeah, you know, like a trendsetter, like bringing back — what is that — 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 not. I can’t go back, Cait. I can not do it.

HOWERTON: (Laughs).

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

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

BODIE: You know, what it takes is a surge of inflation. And then, all of a sudden, everyone – their interest grew.

WONG: Well, not quite everyone.

BODIE: Here comes the shock, Wailin. It’s 23 years later. I have an accountant who does my taxes, okay? So I said to my accountant, I’d like to, you know, buy some bonds. What did he say? What are these?

WOODS: (Laughs) The marketing work continues for Zvi.

WONG: Lonely road (laughs).

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WONG: This episode of THE INDICATOR was produced by Jess Kung with engineering from Josh Newell. It has been verified by Corey Bridges. Kate Concannon is editing the show, Viet Le is our lead producer, and THE INDICATOR is an NPR production.

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Garland K. Long