M is for Money

The new rate for I Bonds was announced last week. As many anticipated, I bonds purchased between May 2009 and October 2009 will earn 0% (0.1% fixed plus semi-annual inflation rate of -2.78%). This reflects pretty steep deflation at -5.56% annually! The 0.1% fixed rate is only slightly better than the 0% offered last year. I bond rates never drop below zero, hence the current rate in the face of deflation.

What are I Bonds?

For those of you unfamiliar with I bonds, they are inflation indexed savings bonds issued by the US government. The rate you earn on an I bond fluctuates every six months, depending on inflation. If inflation goes up, the rate you earn goes up, when inflation goes down, the rate is adjusted downward as well. You always earn the fixed rate at the time you purchased the bond (the current 0.1%) on top of inflation. They are guaranteed by the government, no worries about losing your money, and exempt from state and local income taxes. A few other facts:

1) Purchase at face value
2) $5,000 paper and $5,000 electronic annual purchase limit per person
3) Cannot redeem for the first 12 months
4) If redeemed in the first 5 years, 3 month interest penalty

I bonds are meant to protect you from the effects of inflation. Right now we are experiencing the opposite – deflation – where prices are progressively falling. Under this scenario I bonds offer limited protection, the rate is never below zero. In essence the buying power of your money is preserved, but to anyone used to positive interest the zero return is disappointing. The current rate of deflation is much higher than the fixed rate of return I bonds offer (or have ever offered). All I Bonds will pay 0% for 6 months, even those bought years ago when the fixed rate was above 3%. This includes all the bonds I hold too. It’s tough times for savers right now.

I Bond FAQ


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