Tags: deflation | savings | bonds

Deflation Sign: Savings Bond Rates Hit Zero

By    |   Tuesday, 05 May 2009 10:17 AM

Treasury-bill yields dropped below zero late last year, and now Series I Savings Bonds will yield a big goose egg, too.

I-bonds are linked to inflation. So, thanks to the recent decline in inflation, Treasury announced last week that I-bonds purchased from now until October will have a zero interest rate payment for the initial six months.

That’s a first in the 11-year history of the bonds. Current I-bond holders will see their interest rates drop to zero the next time rates reset.

All I-bonds have a 30-year maturity. I-bond interest rates have two components: first, a fixed rate which lasts for all 30 years. And then the interest rate is adjusted for changes in prices, which usually run upward.

But, this time, prices dropped at a 5.6 percent annualized rate in the six months ended in March, pushing the interest rate down to zero.

There is one piece of good news in this. I-bond rates can’t fall below zero, so bondholders’ principal is safe.

Moreover, "prices tend to go up in the first half of the year,” Tom Adams, editor of Savings-bond-advisor.com, tells The Wall Street Journal.

“So because of that, we'd definitely expect there to be a positive inflation component" the next time the rate resets.

Some experts recommend I-bonds’ cousin, Treasury Inflation Protected Securities (TIPS).

“We think TIPS should be a part of any portfolio,” Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., tells Moneynews.

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Economy
Treasury-bill yields dropped below zero late last year, and now Series I Savings Bonds will yield a big goose egg, too.I-bonds are linked to inflation. So, thanks to the recent decline in inflation, Treasury announced last week that I-bonds purchased from now until October...
deflation,savings,bonds
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2009-17-05
Tuesday, 05 May 2009 10:17 AM
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