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I-Bonds

Question: The 5/12/08 question posed on your blog asking about the new 0.00 fixed rate on I- Bonds has not been answered. As an 83 year old whose nest egg is fast shrinking, this is an important question.... Irma, Berkeley, CA

Answer: I'm stunned that the fixed rate on the I-bond is now 0%. I don't get it. In light of the 0% fixed rate and the move to drastically limit how much savings individuals can put into savings bonds it's hard not to believe that the Treasury is on a campaign to make I-bonds a less attractive investment. My suspicion is that Treasury would prefer individuals invest through Wall Street firms rather than through the U.S. government.

The rate on an I-bond is determined by two things. First, the fixed rate that lasts until maturity, and the variable rate that is based on the rate of inflation over the previous six months. So, these bonds still offer a hedge against inflation. Taken altogether, the yield on I-bonds bought between May and October (when the rate sets again in November) is 4.8%, at an annualized rate.

Like all traditional inflation hedges at the moment--including commodities, real estate and Treasury Inflation Protected Securities or TIPs--I-bonds are not especially attractive. If you already own I-bonds, I would keep them. If you need some protection against inflation and don't have any, then go ahead and consider adding a few I-bonds. Still, it won't be an attractive investment unless inflation spirals sharply higher. In other words, I-bonds are nothing more than a hedge against an upward spiral in the Consumer Price Index.

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