Inflation is breaking new records, so savings held in deposits are losing value faster and faster. Will inflation-indexed treasury bonds save your money? Which bonds are worth buying? Which ones will give you the best returns? There's no point in guessing! Download our calculator and make an informed, numbers-based decision.
UPDATE – OCTOBER 2024
Before you read the rest of the article, know that I published this article in 2021 in response to questions from readers about whether bonds protect against inflation, whether they are still worth investing in, and if so, which bonds to choose?
Since then, the Ministry of Finance has raised bond interest rates several times and introduced new anti-inflationary treasury bonds, i.e. three-year treasury bonds (TOS ).
The last change – published on September 24, 2024 – shows the bond terms for OCTOBER 2024 and they are the same as the September bonds. For all inflation-indexed bonds, the interest rate method and margin amount do not change .
I have updated the CALCULATOR with the changes introduced from October 2024.
Now you can calculate which bond is more profitable for you and whether bonds will protect you from inflation. You can download the updated Excel calculator here:
I have been regularly blogging about inflation-linked bonds since 2014. I will not repeat information about them in this post. If you want to learn more, I refer you to my previous articles:
I also discussed the topic of bonds in depth in Chapter 8 of my book,"Finansowa Fortca", to which I also refer you. If you want to understand the mechanism of this asset, my book will definitely help you with that.
And in this article I will provide you with an advanced Treasury bond calculator that will help you calculate the profitability of bonds in various inflation scenarios. I will also share my conclusions about whether they are still worth investing in and which ones I choose.
This is a good time for a quick reminder: Please remember that all materials presented on the blog are for educational and informational purposes only and are an expression of the authors' private opinions. Please read the detailed legal information at the end of this article.
I recommend it, even though I'm not paid for it
I have been talking about inflation-indexed treasury bonds on my blog since 2014.Back then, I wrotethat these bonds are a great alternative to bank deposits. Although 7 years have passed since then, I am still writing about it consistently.Why?
As you probably know, my mission is to reach 15 million Poles with financial knowledge. And one of the elements of my mission is to share here, on the blog, what works for me. I recommend products that I use myself and that I would recommend to my closest family and friends. And that's exactly what happens with inflation-indexed treasury bonds.
Treasury bonds – can you make money on them?
If you follow the series:"Financial Fortress" in practice, you know perfectly well that about half of the market part of my investment portfolio is invested in inflation-indexed treasury bonds:
Some people look at this portfolio composition with skepticism and I often hear voices that it is not worth investing in inflation-indexed treasury bonds. That is why today I will show you the result of my bonds "on a living organism". Below you will find a screenshot of my account status:
For the sake of completeness, I am also adding the balance of Kasia’s – my wife’s – IKE Bonds account:
Out of pure curiosity, I checked the interest rates on the securities I bought just last year. See what it looks like:
As you can see, the ROD family bonds will pay 14.4% interest for the next year, and the 10-year EDO bonds will pay 13.4%. If you have recently viewed interest rates on available bank deposits, you probably guess that none of them would give me such a result:
But as it is now – does investing in bonds still make sense?
At current inflation rates, are bonds a “sure loss”?
In Chapter 8 of “Financial Fortress” I wrote the following sentence:
Does this mean that – since we currently haveinflation at 12.4%– all is lost (as of May 26, 2022)? Although you may come across voices on the Internet that argue that investing in treasury bonds is a “certain loss” given the current inflation rate, I personally frown upon such statements. Why? Please take a look at the chart below:
The inflation we call “today” is actually the reading for the last 12 months. That is, the latest result presented by the Central Statistical Office in May 2022 – 12.4% – covered the period from April 2021 to April 2022. Therefore, when we consider investing in bonds, “today’s” inflation does not really tell us much. We would need the level of inflation that will be in the future – but since none of us has a crystal ball, we cannot predict what inflation will be in the coming years. Therefore, we cannot say with certainty that buying bonds is a certain loss.
So how can you make a decision? Well, if you follow this blog, you probably know that I am a proponent of making decisions based on calculations and specific scenarios. I don't like to read cards, I don't trust assumptions - I rely on facts. That's why, together with my team, I have prepared an advanced calculator that will help you simulate different scenarios.
Inflation-Indexed Bonds Calculator – How to Use It?
We have spent many hours preparing this calculator to make it a truly functional tool that will help you make a decision about buying bonds.Marcin Kluczek helped a lot in creating the calculator, and together with my wife Kasia, he made sure that all the calculations and simulations worked properly.
What assumptions can you make in our calculator?
You can enter the number of bonds you wish to purchase.
You can assume a different level of inflation for each year.
You can assume a different level of WIBOR 6M or the NBP reference rate each year.
You can assume different interest rates on deposits and savings accounts , with which you will compare the profitability of bonds. In the calculator, I assumed that this rate will also be the interest rate on bonds if a given bond (e.g. ROR, DOR, TOZ, COI) pays interest earlier than on the redemption date.
The calculator compares whether it will be more profitable for you, given your assumptions, to buy one-year, two-year, three-year, four-year, six-year, ten-year or twelve-year bonds,
The calculator also checks how the profitability of a bond investment is affected by its packaging in IKE; I wrote more about IKE in PKO here .
Just enter your assumptions in the fields marked in yellow and the calculator will show you which bond will give you more money.
The Treasury bond yield calculator takes into account many variables, such as:
capital gains tax,
a fee for ending your savings early,
preferential prices for exchanging bonds for new issue bonds, /IN THE CALCULATOR UPDATE I HAVE INCLUDED MORE FAVORABLE EXCHANGE CONDITIONS OFFERED FROM JUNE 2023/
the fact that some bonds pay interest, e.g. monthly or annually, while others pay interest only at the end of the savings period, etc.
That's why I really encourage you to play with this machine - we've done our best to make it a practical, intuitive and user-friendly tool.
Profitability of treasury bonds – specific calculations
To answer the question of whether it is still worth investing in Treasury bonds, I performed several such calculation simulations.
Scenario 1: Average annual inflation over the entire period is 10%
In the first scenario, I assumed that the average annual inflation over the entire holding period of the bonds would be 10%, WIBOR 6M would be 6.7% and the NBP reference rate would be 5.25%. I have to make so many assumptions because:
one-year (ROR) and two-year (DOR) bonds are indexed to the NBP reference rate ,
three-year bonds (TOS) are indexed to WIBOR 6M,
and four-year (COI), six-year (ROS), ten-year (EDO) and twelve-year (ROD) bonds are indexed to inflation .
With this inflation, I also assumed that the average interest rate on deposits and savings accounts would be 6.0%. Looking at what banks are doing today, this is a fairly optimistic assumption, but let's leave it for the purposes of our simulation. And how does it look?
Bond profitability at 10% inflation.
On the above chart, I marked the inflation level with a red line. And for this level, if we invested PLN 1,000, then to break even after 10 years, we would have to receive PLN 2,593.74. And the calculator shows that in this specific scenario, no bonds will give such a result. The closest to beating inflation are 12-year ROD bonds (PLN 2,507.36 after 10 years) and 10-year EDO bonds (PLN 2,425.97).
Below you will find another chart from our calculator, which will allow you to track what the nominal, cumulative rate of return looks like for each type of bond at the end of each year. The red line is, of course, inflation:
Please note that shorter-term bonds, i.e. up to four years, offering lower interest rates (ROR, DOR, TOZ and COI) do not even come close to the results of 6-, 10- and 12-year bonds.
Take a look at the green line representing the 4-year COI and the green-yellow line representing the performance of savings accounts. As you can see, while 4-year bonds won’t beat inflation, they’re still a better option than traditional bank accounts and deposits. You’ll simply earn more on them.
If deposits continue to offer interest rates of around 5.0% (as at the time of writing this article), then basically any bond will give us a better result.
Scenario 2: Inflation declines towards target
The next scenario I put into the calculator is inflation starting at 12.4%, which over the course of 10 years decreases towards the NBP inflation target – i.e. 2.5%. Similarly, I assume that the NBP reference rate, WIBOR 6M and the interest rate on the savings account also decrease. The assumptions I entered in the Treasury Bond Calculator can be seen here:
What happens in such a scenario? Even with high inflation in the first year, if it falls to the inflation target level along the way, 10-year EDO bonds continue to safely protect our assets. After 10 years, our PLN 1,000 increased by inflation will be worth PLN 1,789.70. At that time, our EDO bonds have a nominal value of PLN 1,851.49 – so you see that they have safely protected our assets from loss:
Bond profitability with inflation heading towards the NBP target.
Six-year bonds (ROS will rise to: PLN 1,836.43) and twelve-year bonds (ROD: PLN 1,910.18) will also protect against inflation, while four-year bonds (COI: PLN 1,675.38) will come quite close to beating inflation.
In the case of six-year and twelve-year bonds, however, you must remember that you can invest limited funds in them. These bonds are intended for people who receive benefits from the 500 plus program and you can only pay into them as much as you received from 500 plus.
On the other hand, the "new" one-year ROR bonds, two-year DOR bonds and three-year TOZ bonds will earn much less than inflation and quite similar to what a savings account will give us. However, they have the advantage over a savings account that it is easier to invest significant amounts in them and you do not have to transfer funds between different banks every few months in search of an account with a good interest rate.
Scenario 3: Inflation declines towards 5%
Another, slightly less optimistic scenario that I have considered assumes that inflation in the first year will amount to 12.4%, and in the following years it will decrease to the level of 5%, where it will stop until the end of the investment period:
In this scenario, 10-year bonds (EDO) and 12-year bonds (ROD) will beat inflation, while six-year bonds (ROS) and four-year bonds (COI) will be quite close to this target.
Our new one-year bonds (ROR) and two-year bonds (DOR) will not even come close to inflation.
The cumulative return graph looks even more interesting. See that to beat inflation (red line below) you have to hold bonds for 7-8 years. No bonds will protect against inflation in the first 7 years.
But before you decide that in this scenario it is not worth investing in bonds, please look at what alternatives you have. The light green line, representing money invested in a high-interest savings account, loses to inflation by as much as PLN 439.95 after 10 years. The answer is obvious.
Scenario 4: Inflation rises towards 15%
And how will our bonds behave in a very negative scenario, in which inflation in the first year is 12.4% and then increases to 15%, where it remains until the end of the investment period:
Unfortunately, in this scenario, when there is a fairly large disproportion between high inflation and low interest in the first year, the bonds will not make up for this loss until the 10th year of investment. Although the interest rate on the bonds was significantly raised in May 2022 in the first year, it is still much lower than inflation.
The 12-year ROD or EDO bonds will not make up for this loss either.
The situation will change when we wrap our investment in IKE – then we will not pay Belka tax when withdrawing funds. In such a scenario, ordinary 10-year EDO bonds will be enough to protect the value of the investment against inflation:
Bond calculator – key conclusions
Below you will find the most important conclusions that I drew from my "playing" with the bond calculator.
No investment is guaranteed to beat inflation 100% of the time.
In scenarios likehyperinflationor the collapse of our currency, even these types of bonds won't work. Keep that in mind when building your portfolio.
What alternatives do you have to the stable part of your portfolio?
With the first conclusion in mind, ask yourself – what is your alternative? If it is keeping your money in low-interest deposits, consider whether it makes sense.
Compare investments with similar risk.
This is a very important point – I often hear voices: why invest in bonds, it is better to keep 100% of your assets in stocks . And there is probably some truth in this – investing in stocks over the course of, for example, 30 years will probably bring higher profits. The question is, however, will you survive all the painful lows that will certainly happen over these years? That is why I always encourage you to look at bonds as a stable part of your portfolio.
Some bonds perform better than others
According to my calculations, the best performing indexed bonds will be :
(1) EDO wrapped in IKE Bonds – if you are not yet using IKE , it is worth considering opening IKE Bonds to avoid paying the "Belka" tax and increase the profitability of bonds purchased in this way.
(2) Family bonds ROD and ROS are a very good solution . These bonds guarantee the highest interest rates but... they are available only to people who receive benefits from 500plus and only up to the amount of funds we have received. I use the limit of PLN 1,000 per month that I am entitled to and every quarter I buy ROD for PLN 3,000 (3 months x PLN 1,000 monthly limit for my two daughters).
3) It is better to buy twelve-year bonds (ROD) than six-year bonds (ROS). Why? Because buying ROS and ROD uses the deposit limit to the same extent and twelve-year bonds have much better interest rates. The difference in interest rates is significant enough that even ending the investment earlier and paying a fee for the return (PLN 2 for each twelve-year bond or 70 groszy for each six-year bond) does not change the fact that in most scenarios you will earn more on ROD. For example, look at the cumulative rate of return on these bonds in Scenario 3, which I described above:
For the first 6 years, ROD and ROS give almost the same amount of earnings, but after the 7th year, 12-year bonds are unrivaled.
4) It is better to buy EDO than COI. Ten-year bonds have higher interest rates, and this means that even when we take into account the fee for early termination of the investment - this fee is 70 groszy in COI and 2 PLN in EDO - in most scenarios and years EDO performs better or at least as well as COI.
This is clearly visible in the graph below (assumptions as in Scenario 3, which I described above):
Don't bet on one horse - build a portfolio of different assets tailored to your needs.
You can read more about how to do this in my book –“Finansowa Forteca”.The entire first part of the book (over 250 pages) is devoted to building your own investment strategy. In the second part (over 400 pages) – I discuss in detail the assets that can be in your portfolio. After reading the book, you will be able to compose a portfolio that will suit your strategy and your appetite for risk, and will help effectively protect your assets from inflation.
Download the CALCULATOR and calculate it yourself!
Don't base your decision to invest in bonds solely on this article and my conclusions. Be sure to download our calculator and calculate different scenarios.
Finally, I have an answer for you to one more question that often appears in my email box:
Is it worth waiting to buy bonds? Is there a chance they will be cheaper?
There is always a chance – unfortunately none of us knows the future, nor do we have any leaks from the Ministry of Finance on how they plan to pay interest on bonds in the coming months. Much depends on how inflation will develop in the coming months, whether the government has the ability to obtain cheaper debt, etc. In 2022, through May, we had three changes in interest rates, and the update (May 2022) really caused a lot of confusion. If you feel uncertain about the possibility that interest rates will increase in the coming months, you can buy bonds in several installments.
That's all for today, I really hope that this article, but most of all - the calculator available here will be useful for you and help you make a good decision for you. And since my team and I really worked hard to prepare this material, I would be very happy if you left your comment and shared this article with your friends. Please let me know what you think about investing in bonds and how you like working with our calculator.