Fear the Fed's rate raise? Savers can fight back with these 9.6% inflation-proof US bonds

I Bonds haven't lost any of their appeal to investors in recent months and with rates based on a formula tied to inflation, they can be a saving grace as interest rates rise.

With the Federal Reserve Board initiating its biggest single interest rate hike in 22 years, there's a move every investor can make to try to help compensate for credit card balances, car loans and mortgages becoming more costly.

Receiving far less attention than the Fed's action, the Treasury Department delivered a little gift to beleaguered savers on Monday. It raised the rate it pays on I Bonds to a whopping 9.6%.

That's way above what banks pay on interest checking, CDs and, for that matter, a sure bet at a time when stocks and bonds have both been losers. I Bonds are a counterpoint to the Fed which raised its closely watched lending rate Wednesday by a half-percentage point in a bid to nip rising pri

I Bonds are government-backed, inflation-protected securities. The rate rises or falls based on inflation, but can never fall below 0%, so savers’ principal is always protected.

“Given the current environment of rising rates and inflation, investors are looking to I Bonds to earn significantly more returns on their savings over time,” said Mychal Campos, head of investing at digital investment advisor Betterment.

Adjusted twice a year, the new rate follows a 7.12% rate for the past six months. The rates track inflation, which has been rising after the dislocations in the economy brought on by the coronavirus pandemic and more recently, Russia's invasion of Ukraine, which has raised energy prices.

How to buy I Bonds

The new rate is based on a formula tied to the 8.5% inflation rate reported last month, the highest in 20 years. If inflation falls, the interest rate on I Bonds will pay less interest when it reset in November.

Investors have to hold on to the bonds for at least a year and can’t invest more than $10,000 annually, under the rules set by the Treasury Department.

Though the rate is soaring, the Treasury Department didn’t add a fixed interest rate to its latest I Bonds offering that would have sweetened the deal even more. That hasn’t happened since 2019. The entire rate, thus, is tied to the inflation formula.

I Bonds aren’t the only option for investors worried about inflation. There is also another government offering, Treasury Inflation-Protected Securities, or TIPS, which operate under different rules.

I Bonds are sold direct to the public at the Treasury's website, treasurydirect.gov. Because they are not sold through brokerages and because their inflation-tied interest rates were so low – they touched 0% at one point – they haven’t attracted as much attention from investors.

I-Bonds in paper form.

A 'no-brainer'

“This is a no-brainer for everyone,” said Ken Tumin, senior industry analyst at LendingTree and founder of LendingTree’s rate tracker Deposit Accounts.

Everyone, that is, except those building their emergency funds who might need the cash sooner than in a year.

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