The U.S. Treasury was expected to cut the fixed interest rate on inflation-indexed savings bonds Thursday. And cut it 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 May 1 and Nov. 1 each year, and the Treasury also has the option of changing the fixed rate on new bonds on those dates.
Thursday'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 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 got a big haircut Thursday: 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."
As for I-bonds in particular, Pederson says that with a zero fixed rate, they're now appealing only "if you think inflation is going to spiral out of control."