Time to buy an I bond has passed

Early this week, I recommended that you hurry up and buy inflation-linked U.S. savings bonds - I bonds - before the U.S. Treasury set the new interest rate on them. That was better advice than I could have possibly known.

The Treasury Department released the new rate on I bonds yesterday. If you bought an I bond before yesterday, you'll get a better return on the investment over time. But if you're still waiting to buy, well, you might not want an I bond at all now.

I bonds have two rate components: an inflation rate that changes every six months based on the Consumer Price Index, and a fixed rate that doesn't change for the life of the 30-year bond. The rates are combined, adjusted slightly upward, to give you the rate for your I bond.

The rate on new I bonds for the next six months is an annualized 4.84 percent. Not bad, you might think. But that's purely the inflation component. The fixed rate on new bonds is 0.00 percent.

No, that's not a typo. The rate is zero. Nada. Zip.

Savings bond experts had predicted that the previous fixed rate of 1.2 percent would be cut. But no one expected zero.

Ever since I bonds were introduced in 1998, they promised a rate of interest plus the inflation rate so you always came out ahead of inflation - which is sort of the point of investing. Buy an I bond now, and you will only earn the rate of inflation as long as you own the bond.

Silver Spring financial planner Peg Downey says she can't think of one reason why someone should buy I bonds now, unless they are so nervous about the economy that they only want to break even with inflation.

Most investors, she says, can't afford "not to have money grow at all."

Says Tom Adams, author of the Savings Bond Advisor, "I feel as if savings bond investors are being scorned and ridiculed by the Treasury."

Changing mind

John Feroli of Aberdeen purchased I bonds in 2003 and 2005 and considered doing so again. He changed his mind yesterday when he looked up the new rates on Treasury's Web site.

"Absolutely not. I'm not going to be stuck with a 0.00 fixed rate," the retired engineer says. "All they cover is the rate of inflation, so you are gaining nothing."

Stephany Murray of Timonium is grateful she bought her bond the day before the rate change.

"I was just under the wire. It was a quarter to five and I called the bank," the 72-year-old says. "I said, 'Stay open, I'm coming.'" And knowing that the fixed rate could be changed the next day, Murray made sure the bank employee wrote down the correct purchase date.

Her only regret is that she didn't buy more.

Savings bonds experts predict that some investors who buy I bonds in the next six months will do so because they don't understand how the rates work.

"To those who don't understand and look at the rate and see 4.84 percent, they will think it is a pretty attractive rate," says Daniel Pederson, author of Savings Bonds: When to Hold, When to Foldand Everything In-Between.

But the inflation rate will only be good for six months. Then for the next six months, you'll get the latest inflation rate. And if inflation is tamed, you might get little for your money. "It can be zero," Pederson says.

No switching

And you can't get relief by switching to the other savings bond, the Series EE. The fixed rate for new EE bonds is now 1.4 percent, down from 3 percent. This new EE rate doesn't even keep up with inflation.

Of course, when the government issues bonds, it's borrowing money. The aim is to offer a rate that entices investors but not so high that savings bonds become an expensive means of borrowing.