If you didn’t pick up your Series I savings bonds by April 30th, it may be too late to bother now. On May 1 2008, the inflation rate on Series I Savings Bonds fell to 0% interest!
According to Bloomberg, this is the lowest these savings bonds have fallen since I-Series bonds (also known as Inflation-Indexed bonds) were introduced in the 1990’s.
Fortunately, these bonds cannot fall any lower, as the return on I-Series bonds cannot go into negative numbers. If they did, bondholders would be paying interest on these savings bonds. With any hope, the rates on I-Series bonds will be adjusted upward when rates are reset on November 1st.
Why Did They Go So Darn Low?
In an article entitled Why Did the Treasury Department “Refocus” the I-Bond Program, the reasons for the flat-lined rate is because they wanted to refocus the bonds to make them marketable to people with small amounts of money to invest.
In other words, I-Series savings bonds were created to encourage people with modest incomes to save more money. Instead, the high rollers got involved and were making great gains. While those who invest $30,000 in I-Series bonds will take a financial hit, those who purchased $5,000 a year or less in savings bonds will not see much of an impact in the rate change.
James Picero, who penned the above article is suspicious:
This is no big deal in the grand scheme of finance, although we can’t help but notice that the new lower limit comes at a time when inflation-linked portion of payouts for I-Bonds look set to rise, as per the methodology that ties a portion of the bonds’ interest rate to the consumer price index.
What Exactly Are Series-I Savings Bonds Anyway?
An I-Bond is a type of savings bond that allows you to earn interest on your money and protect you from inflation. They are designed to pay bondholders a fixed rate plus the national interest rate.
When you purchase a bond, the inflation rate on the bond is fixed for the life of the bond. For this reason, bonds purchased up to April 30, 2008 were 4.28 % plus a fixed rate of 3%. While bonds purchased from May 1 until October 31, 2008 have a rate of 4.84% with no additional fixed rate.
The United States Treasury Department’s Bureau of Public Debt created US Savings bonds, which are also called treasury securities. They are debt-financing instruments of the U.S. government and cover about 3% of the U.S. debt. They can be redeemed as early as one year after purchase — making them very liquid — and most bonds are free from penalty after 5 years. They typically take 20 years to mature to face value which is twice the amount paid. I-Bonds are one of several types of U.S. savings bonds.
more information on I-Series savings bonds (and savings bonds in general), visit the Treasury Direct website.
Are There Any Incentives To Purchase Savings Bonds Right Now?
While I-Series savings bonds are less desirable today than they were just a month ago, there are still reasons you may want to purchase savings bonds at this time.
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Your savings bonds will never decrease in value. If you spend $50 to buy the bond, it will never be valued less than $50.
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Interest rates on Savings bonds are competitive with Bank CD interest rages.
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You do not have to pay interest on your bonds until you redeem them.
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If you use bonds to pay college expenses, you may be exempt from taxes on the interest.
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Savings bonds are easier to understand that the stock market.
