Inflation Adjusted Bonds

By: EconomyWatch   Date: 14 October 2010

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Inflation not only affects the price level, it has an overall impact on all spheres of the economy. Stocks, bonds, investments are equally affected. Bonds are important tools, which safeguard individuals at the time of inflation. Bonds are safe to invest in, although the returns are less when compared to stocks.

Stagflation:

Whenever there is slowing down of the economy, interest rates drop. This impacts bonds because with decline in the interest rates, the price of bonds increases. Inflation adjusted bonds are those, which adjust the value of the bonds as per the rate of inflation, so that the value of the bonds do not subside. Although investing in bonds is safe but a condition, which is characterized by slow economy and increase in rate of inflation may hamper bonds.

One may adopt the following options, in the event of stagflation. Stagflation is a condition, which is characterized by slow economic progress and increasing inflation rate. To protect ones portfolio from stagflation investments can be made in the following:

  • Money market funds
  • Inflation adjusted bonds.
Investing in inflation adjusted bonds:

I)Inflation adjusted I Bonds or Inflation adjusted savings bonds-

The inflation adjusting part of the I Bond (an I Bond rate has two parts- one is a fixed part and remains the same throughout the tenure of the bond , the other is the inflation adjusting part). For the protection of ones portfolio from inflation, investing in inflation adjusted savings bond is not a bad idea .

II)Inflation adjusted treasury securities-

Treasury bonds are inflation adjusted bonds and are of the following types:

  • Treasury bills
  • Treasury notes
  • Treasury inflation protected securities or TIPS.
  • Treasury bonds
For more information on Inflation Adjusted Bonds, one may visit the links given below:

 


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