Treasury hacks interest rates on new savings bonds

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The U.S. Treasury has once again opted to lower the returns on savings bonds, as interest rates in general have plunged over the last six months.

For only the second time in the 12-year history of inflation-adjusted savings bonds -- known as Series I bonds -- the guaranteed fixed rate on newly issued securities was cut to zero.

The bonds still will earn a return pegged to inflation, but there won’t be any extra pop from a guaranteed return.

The government resets rates on newly issued savings bonds every May 1 and Nov. 1. Series I bonds earn the combined total of their fixed annual rate, which is set for the 30-year life of the bonds, and the inflation rate as measured by the Consumer Price Index. The inflation adjustment is recalculated every six months for new and outstanding bonds.

In a statement Monday, the Treasury said I bonds issued through May 1 would earn an annualized interest rate of 0.74% in their first six months, down from 1.74% on bonds issued in the previous six months. The entire 0.74% return on new bonds would be the inflation adjustment, based on the change in the CPI from March through September.

The fixed rate alone on I bonds had been as high as 3.6% in the early 2000s, but the Treasury has been whittling it down since then. It was 0.20% in the last six months. The last time the fixed rate was zero was in the period of May 1 to Oct. 31, 2008.

Owners of previously issued I bonds can see what their guaranteed fixed rates are in a chart provided on savings-bond-advisor.com. Add 0.74% to the fixed returns to get your new earnings rate.

It isn’t surprising that the Treasury cut the fixed rate on new I bonds to zero, given what happened last week: At an auction of five-year TIPS bonds (Treasury Inflation-Protected Securities) -- securities used by many big investors to hedge against inflation -- buyers accepted a negative interest rate for the first time ever.

That means they were so eager to get bonds with a guaranteed inflation adjustment that they were willing to take a negative return to start out.

The message there for potential Series I savings bond buyers: If you think higher inflation is coming, the bonds still offer a decent way to hedge against that, because their returns will match the change in the CPI.

The Federal Reserve, which on Wednesday is expected to launch a new program to pump more money into the financial system and the economy, has made clear it would prefer higher inflation to the alternative of potential deflation.

The Treasury on Monday also cut the interest rate on new Series EE savings bonds. Investors buying those bonds in the next six months will lock in a fixed annual rate of 0.60% for life, down from a rate of 1.40% on EE bonds issued in the last six months.

But if you can hold EE bonds for 20 years, the government guarantees that the bonds will double in value at that point. That would equate to an annualized return of 3.50%.

-- Tom Petruno