Bonds: a Risk-Free Hedge Against Inflation?

Hey, remember bonds? Those things your grandparents invested in and gave you for Christmas? Well, they’ve gained a bit of attention now, and for good reason. 

A bond is basically a way for an entity or individual to raise money for something (like a project or development). The bond becomes an I-Owe-You of sorts where the investor is returned their money with interest. The interest that you make from a bond is called its yield. 

This asset class is typically skipped over simply because they aren’t a “sexy” investment. The result is that many people are not well informed about their benefits and that the current economy (November 2022) is ripe for an opportunity to make a passive income from a risk-free investment adjusted for inflation. Let’s take a look at what’s going on here.

What Makes Bonds a Good Investment 

People are looking for ways to make more money in our current economy because of the high inflation rates. Risky, volatile investments aren’t as attractive as they once were. 

While bonds may not be the kind of investment you can retire from, the high inflation rates have created a window of opportunity making them more lucrative than putting your money somewhere risky or just leaving it in a bank. 

Higher interest rates

Currently, three-month bonds are yielding around 4.19%. Essentially, you will earn 4.19% interest on top of your deposit. In contrast, that is about 4 times more than you would get from your bank in a shorter time. 

You can compound the interest

What happens when you leave your money in a bond passed the 90-day mark? Not only will you continue to receive interest, but you’ll also receive interest on that interest. That means your profit will compound over time. 

Who does this benefit? Let’s say you have a lump sum of money you can go without for 90 days. You can leave it in the bank to potentially deflate over time, or you can make a 4.19% return. If you still don’t need the money, you can leave it for another three-month cycle and compound the interest. 

It’s a risk-free investment

Bonds are built on full faith in the government’s monetary system. The only way a bond could fall through is if the entire currency system of the USA collapsed. Not likely. In fact, it’s almost impossible. So not only are you promised your money back but you’re also promised a fixed interest rate within the 3-month period. 

There are bonds that can hedge against inflation

I bonds are basically issued to counter inflation. They are adjusted for inflation every 6 months. This is where bonds are gaining renewed popularity. The opportunity here is to make high interest rates due to high inflation. They are exempt from state income tax, and you can invest anywhere from $25 to $10,000 in an I bond and keep it there to compound over time. 

As a side note for best practices, people who invested before rising inflation are the ones who make out the most money. It’s an excellent investment for the long-term, but if inflation rates fall, the yield will become too low to really care about, and at that point, you would want to pull out your money to keep or reinvest. 

Final Thoughts

If you’re sitting there reading this and not thinking, “this is a good idea,” you may be missing the point. The money you have sitting in your bank or savings account right now could be making you more money. While people are wondering what to do about inflation, you now know of a risk-free way to make inflation work to your advantage. 

As a bonus tip, bonds are straightforward to get into, unlike other investments. At treasurydirect.gov (not a sponsor), you see current rates and invest directly in bonds as quickly as you would put a deposit in the bank.