Returns on inflation-adjusted savings bonds plunge to zero

This article was originally on a blog post platform and may be missing photos, graphics or links. See About archive blog posts.

The U.S. Treasury now is offering zero incentive -- literally -- to potential new buyers of Series I U.S. Savings Bonds, which earn returns adjusted for the inflation rate.

In its semi-annual rate adjustment for I bonds, announced Friday, the Treasury said bonds purchased between now and Nov. 1 will earn nothing in their first six months. That’s the first zero return on I bonds for any six-month period since they were launched in 1998.

The problem, as you might suspect, is that inflation went negative.

I bonds earn the combined total of their fixed rate, which is set for the 30-year life of the bonds, and the inflation rate as measured by the consumer price index.

As the economy plunged from September through March the CPI also sank, dragged down by plummeting energy prices in particular. The annualized rate of change on the CPI in the period was negative 5.6%, the Treasury said.

Applied for the next six months, that will completely offset the fixed rate of 0.1% on newly issued I bonds, which the Treasury cut from the 0.7% fixed rate on bonds issued in the last six months.

Outstanding I bonds also won’t accrue any return in their next six-month adjustment period.

Still, I-bond investors are guaranteed that their returns can never fall below zero, even if the CPI were to continue to decline.

I bonds were far more attractive a decade ago, when the Treasury was offering fixed rates as high as 3.6%. The latest cut in the fixed rate on new bonds, to 0.1%, is a disappointment, particularly given negative inflation. I’ve noted previously that the Treasury seems to be trying to make savings bonds less attractive to Americans, rather than more so.

Even so, if you think inflation will revive in the next few years thanks to the government’s massive effort to reflate the economy, I bonds still would offer a way to preserve your purchasing power by rising in line with the CPI.

Wondering about the merits of I bonds versus Treasury Inflation-Protected Securities (TIPS)? See this piece on the Motley Fool website.

Another useful site: savings-bond-advisor.com.

-- Tom Petruno