If you’re worried about inflation, there are certainly many ways to hedge. You can do it via the stock and real estate markets, but what if you may want something more liquid and less risky than this? Well, there’s always U.S. Treasury Inflation Protected Securities or TIPS or this other product called the I-Bond. Here are a couple of helpful definitions:
TIPS. The principal of a TIPS rises with inflation and falls with deflation, as measured by the Consumer Price Index. When a TIPS matures, you’ll receive the adjusted principal (based on inflation rates) or original principal, whichever is greater. TIPS pays out a fixed interest rate every 6 months, and its interest payments, along with the principal, also rise and fall with the inflation rate.
I-Bonds. These bonds are similar to other savings bonds except that its interest rate is adjusted according to the inflation rate every 6 months. But you’ll need to hold on to this for at least 5 years or you’ll get a penalty for redemption (equivalent to interest earned over the last 3 months). Note that I-Bonds’ interest is accrued until the bonds are redeemed.
But I also wanted to do some research and find out if there’s anything else available beyond this that a bank would carry.
From what I’ve read, there seems to be such a product that was made available some years ago called the CDIP. It’s called an “inflation-protected certificate of deposit” or CDIP which is supposed to work similarly to TIPS. Here’s how they’re supposed to work by definition: this type of CD pays a rate of interest that’s fixed and is pegged to the inflation rate. Their returns are adjusted according to the inflation rate, which is determined by the Consumer Price Index (CPI). While they’re similar to regular CDs in that they pay a fixed interest rate, their payment schedule is different, since their returns are paid out every 6 months. Basically, the CDs are linked to how inflation moves. Like any other regular CD, they’re also FDIC insured.
Now what happens if the inflation rate just keeps declining during the CD’s term? When the CD reaches maturity, you’ll get your full principal back. That’s possibly the worst that could happen in this case. Sounds all good right? I thought so, now that inflation may be gearing up in the near future, no thanks to the stimulus packages that our government has been churning out these past few years.
So I went about in search of these CDIPs and here’s what I’ve learned: there were a couple of affiliated banks that had introduced this bank product some years ago — LaSalle Bank and Standard Federal Bank which were at one point held by the same company — but it looks like these banks have been swallowed up by Bank of America a couple of years ago. And along with that sale, it appears that the CDIP is no longer available. Of course, if it is, it would be great to hear about it! Let us know if you hear of this financial product being sold anywhere.
Then again, with interesting, new-fangled bank products, there are also fees to consider. And I’ve read that because the CDIP had been sold through financial advisers and brokers exclusively, that you’d have paid extra (through fees or lower rates) if you opted for its purchase.
Now I wonder if the CDIP will make a comeback sometime, especially when inflation starts to pick up and rear its ugly head. Then again, if it doesn’t, there’s always your trusty TIPS and I-Bonds to turn to.