Fixed rate on I-bonds takes a buzz cut

The U.S. Treasury was expected to cut the fixed interest rate on inflation-indexed savings bonds today. And cut they did -- all the way to zero.

I-bonds, as they’re called, earn a combination of a fixed rate, which holds steady for the 30-year life of the bond, and the inflation rate as measured by the Consumer Price Index. The inflation component is adjusted each May 1 and Nov. 1, and the Treasury also has the option of changing the fixed rate on new bonds on those dates.

Today’s announcement was a shocker: I-bonds sold between now and Oct. 31 will have a zero fixed rate, down from 1.2% on I-bonds sold in the last six months.

The inflation component of the return still is attractive: It will be an annualized 4.84% for the next six months, thanks to the recent surge in the CPI. But imagine that inflation ebbs again in the next few years. With a zero fixed rate on new I-bonds, your return could dwindle, even to nothing at all.

A Treasury spokeswoman in Washington said the fixed rate on I-bonds was cut based on a formula that takes into account rates on the government’s inflation-indexed Treasury notes. "It’s just the way the formula works out," she said.

Series EE bonds, which pay a fixed rate, also took a big haircut today: Newly purchased EE bonds will pay just 1.4% a year, down from 3.0% on bonds bought in the last six months. So new EE bonds are paying less than six-month T-bills, which yield 1.61%.

Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold," sees a disturbing trend here. "I think the government has been looking for some time to push people away from Savings Bonds and into regular Treasuries," he says. As for I-bonds in particular, Pederson says that with a zero fixed rate, they’re now only appealing "if you think inflation is going to spiral out of control."

Photo: U.S. Treasury Building in Washington

Posted May 1, 2008

Comments

[x]

Not to mention that with new I bonds 0% over inflation, you still have to pay taxes on the inflation part of your returns eventually, meaning you don't even keep up with inflation with I bonds anymore.

[jdj]

Yes, sad what the treasury is doing to the once great savings bond program. This latest development, the 0% fixed rate on I-Bonds, is the second in 6 months that shows the contempt this treasury has for savings bonds. The first was the yearly purchase limit being slashed to a paltry $5k electronic ($5k paper) from the previous $30k electronic ($30k paper).

The last time the limit was that low was in 1973 (Though, that $5,000 in 1973 dollars would be over $24,000 today). They claim it was to 'refocus' the program on small investors but how does it make a difference to someone with $50 to invest whether the limit is $5k or $30k. Just Orwellian double-speak.

It seems clear that the treasury doesn't like savings bonds since the price can't be manipulated by the Fed the way marketable securities prices, like treasuries, can and they take business away from brokerages and investment banks. Not to mention that I-Bonds, unlike TIPS, are tax-deferred.

The only hope is that a Democrat would restore the program to its former glory, since both TIPS and I-Bonds where created during the Clinton years.

[David]

Isn't this effectively an admission by the Treasury that it expects deflation?

[Richard Toth]

This is typical of Washington politicians what they do to a decent program for savers and how they help the brokers. I am sure that they are going to change the laws on the 401 and 403B savers when these people cash in their savings in the future, that is if the stock market doesn't continue to tank and people lose their savings and much of their principal. The tragedy of everything is how both parties have continued to allow American companies to take jobs out of this country., form monopolies, avoid taxes, price fix, get outrageous subsidies, etc. The politicians want to talk about traitors to this great United States in regard to our problems in the world but all they should do is look in the mirror because both parties constitute the epitome of our modern day Benedict Arnolds.