TIPS vs I Bonds vs EE Bonds

Looking for a hedge against inflation? TIPS and I Bonds might be the answer. EE Bonds, on the other hand, offer different benefits.

Written by Medora Lee / June 23, 2022

Quick Bites

  • If runaway inflation worries you, adding inflation-linked investments like TIPS and I Bonds can provide your portfolio with some protection.
  • EE Bonds are not connected to inflation and pay a fixed rate, which is a good bet if you think inflation’s going to be tamed.
  • Either way, fixed-income Treasury securities are among the safest investments to consider adding to any diversified portfolio.

TIPS, I Bonds and EE Bonds are all securities of the U.S. Treasury, meaning they are considered among the safest investments you can hold. TIPS and I Bonds are linked to inflation, which could be a good choice as we watch milk and gas prices jump. EE Bonds offer a fixed rate, providing a more stable investment outlook.

We’ll delve deeper into these investments and which make sense for who and when.

Inside this article

  1. What's a bond?
  2. What are TIPS?
  3. What are I Bonds?
  4. What are EE Bonds?
  5. How are they similar?
  6. How do they differ?
  7. Who should buy which?
  8. FAQ

What's a bond

A bond is a type of security. Governments and companies use bonds to raise money. Basically, when you buy a bond, you’re lending money to an entity, in this case the U.S. Treasury, and that entity promises to pay you back with a specific interest rate for the life of the bond.

The principal, the original amount you loaned the entity, is also known as the face value of the bond, and the entity will pay it back when the bond “matures,” or that agreed-upon term of the bond comes to an end.[1]

What are TIPS?

Treasury Inflation-Protected Securities, aka TIPS, are bonds that provide protection against inflation.[2]

The principal of the bond increases or decreases twice a year in line with movements in the consumer price index (CPI), a measure of the change in prices we pay for a basket of goods and services.

When the bond matures (they come in five-, 10- and 30-year maturities), you receive either the adjusted or original face value, whichever is greater.

In the meantime, fixed interest on TIPS is paid twice a year but since the principal is variable on inflation movements, interest payments rise and fall with the inflation rate. They’re sold in $100 increments.

You can buy TIPS either directly from the Treasury or from a bank or broker. They can be held to maturity or sold before then on the secondary market. The limit on how much you can buy reaches into the millions.

What are I Bonds?

I Bonds, like TIPS, also protect investors against inflation but in a different way. Instead of the principal being adjusted in line with the CPI, the interest on the bond is. In other words, the principal is fixed in this case, but part of the interest rate is variable.[3]

We say part because the interest rate of an I bond is comprised of two rates: a fixed rate and an adjustable rate that moves up or down with inflation and is adjusted twice per year. The bond earns interest until it reaches 30 years or you cash it, whichever comes first.

Are I Bonds a Safe Investment?

Are I Bonds a Safe Investment?

I bonds are safe in the sense that they’re backed by the U.S. government. But there’s more to know about this inflation-protected investment.

Find out more

These bonds start at $50 face values and can only be bought directly from the Treasury.

Unlike TIPS, the amount you can buy is capped at $10,000 with an additional $5,000 allowed if you use your federal tax refund to buy them (those last $5,000 are paper bonds, while the first $10,000 are digital).

What are EE Bonds?

EE Bonds are regular 30-year Treasury bonds that have a fixed interest rate. They can be held for the full 30 years or sold, or cashed out, on the secondary market before that. If you hold the bond for 20 years, no matter what the rate is, the face value is doubled.[4]

You generally can only buy up to $10,000 worth of EE Bonds per calendar year directly in electronic form directly from the Treasury.

How are they similar?

All three–TIPS, I Bonds and EE Bonds–are securities of the U.S. Treasury, meaning they are considered among the safest and safest investments you can hold. They have the full faith and credit of the U.S. government, which means the government guarantees that interest and principal payments will be paid on time. Also, most Treasury securities are liquid, which means they can easily be sold for cash.

TIPS and I Bonds are also similar in that they are both designed to hedge against inflation, and neither has a guaranteed return. Each one has a component that is adjusted twice per year in line with movements in the CPI.

I Bonds and EE Bonds both lose the previous three months of interest if you cash out early, during the first five years. You also can only buy a maximum of $10,000 of each, though you can buy an additional $5,000 of I Bonds if you use your federal tax refund.

All are only subject to federal income tax unless the money is used for higher education.[7]

How do they differ?

The interest rate on I Bonds is adjusted every six months up or down depending on inflation, while with TIPS it’s the principal that’s adjusted. Either way, both are hedges against inflation.

By contrast, EE Bonds have a fixed interest rate that’s determined at the time you buy the bond. It also has a guaranteed return–after 20 years, you get double what you paid for it. And of course, all the interest that has accrued on the bond during that time.[5]

All can only be bought directly through the Treasury, but TIPS also can be bought and sold in the secondary securities market via banks, brokers and dealers, making TIPS more liquid.[6]

It’s a Great Time to Buy I Bonds

It’s a Great Time to Buy I Bonds

If you purchase an I bond anytime from May to Oct. 31, you’ll get an annualized 9.62% return for the first six months—that’s pretty impressive.

Find out more

You can invest millions of dollars at a time into TIPS but are limited to $10,000 in I Bonds and EE Bonds, with an additional $5,000 in I Bonds if you use your federal tax return money.

Tax reporting for EE Bonds and I Bonds can be deferred until redemption, final maturity, or other taxable disposition but the interest and inflation adjustments on the principal on TIPS has to be reported in the tax in the year that they occur.

Who should buy which?

Bonds, in general, have been clobbered by stocks in the past couple of years with the Federal Reserve keeping interest rates near zero, ensuring the rate on almost any bond you hold will be low. On top of that, inflation has steadily expanded which erased any return, and maybe more, on your holdings.

But now with inflation surging, the Fed aggressively raising interest rates to curb it, and stocks in bear market territory, investors can start looking at bonds again.

The Fed Fights Recessions by Dropping Rates—Unless Inflation’s Out of Control

The Fed Fights Recessions by Dropping Rates—Unless Inflation’s Out of Control

The Federal Reserve has eased past recessions by cutting interest rates, but right now it’s committed to raise rates to bring inflation under control.

Find out more

If inflation worries you, I Bonds and TIPS may work for your portfolio as a hedge since each has a component that moves in line with consumer prices. Note that I Bonds have to be held at least 12 months before they can be sold, and should you hold for less than five years, you will forfeit three months of interest.

With TIPS, you can buy a lot more and the liquidity can be an attractive option for those who need or want it. And they pay you regular, semiannual interest payments if you want a steady stream of income. But note that because the inflation adjustment to the principal as well as the income payments are subject to federal tax each year, you may want to hold these investments in your tax-sheltered accounts like a 401(k) or IRA.

If you’re feeling queasy by the volatility in the markets these days and you think the Fed can get inflation under control by raising rates aggressively, there might be a window for you to buy the very safe EE Bond.

The so-called real-yield, or the difference between the 10-year yield and the inflation rate, has been negative for a while, but rising interest rates and a drop in inflation can reverse that, which would mean EE Bond returns will be positive.

“This would help government bonds to once again be meaningful contributors to the total return investing strategies that many retirees and other savers rely on to supplement Social Security, pensions, and other sources of income,” according to Fidelity Investments. EE Bonds make regular, semiannual interest payments.

FAQ

Is it time to consider buying Treasury bonds?

Yes. I Bonds and TIPS can help protect your portfolio against soaring inflation, while the current cycle of rising interest rates can boost the regular payout of an EE Bond. Treasury bonds are also among the safest investments you can own in a well-diversified portfolio.

How do I Bonds and TIPS hedge against inflation?

Part of the interest rate on I Bonds is adjusted twice a year in line with changes in the consumer price index. The principal value on TIPS is inflation adjusted twice a year.

Article Sources
  1. “What are bonds?” Investor.gov. https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
  2. “Treasury-Inflation Protected Securities.” TreasuryDirect. https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm
  3. “Buying Series I Savings Bonds.“ TreasuryDirect. https://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ibuy.htm#what
  4. “Buying Series EE Savings Bonds.“ TreasuryDirect.https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eebuy.htm#:~:text=gifts%20for%20others%3F-,What%20is%20an%20EE%20bond%3F,a%20fixed%20rate%20of%20interest.
  5. “Comparing Series EE and Series I Savings Bonds.” TreasuryDirect. https://www.treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds_eecomparison.htm
  6. “Comparison of TIPS and Series I Savings Bonds.” TreasuryDirect. https://www.treasurydirect.gov/indiv/products/prod_tipsvsibonds.htm
  7. “Education Planning.” TreasuryDirect. https://www.treasurydirect.gov/indiv/planning/plan_education.htm

About the Author

Medora Lee

Medora Lee

Medora has more than 25 years of experience reporting, writing and editing mostly as a finance and economics journalist around the globe. She has covered every aspect of finance and economics, including the fall of Barings Bank in 1995 and Europe's transition to Economic and Monetary Union and the birth of the euro. She has worked at such international stalwarts as Reuters and Forbes.com as well as startups that grew up like theStreet.com.

Full bio

Part of Our Guide to I Bonds

View all >
0

Related Content