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I-bonds at 0%

Chris Farrell May 5, 2009

Question: Every May and November I download the redemption values for my I Bonds. I use the program called “Savings Bond Wizard” that goes to the government website and automatically downloads the values of the bonds for the next period of time (in this case it would be May 2009 thru Nov 2009). Every time I have done this in the past, I can see how my bonds increase every month. This time, I did not see any increase at all in any of the months May June July Aug Sept Oct or Nov 2009. Do you know why this is? Could it be that my bonds will not grow any interest at all for all those months? Thanks for your help! Maxine, Danvers, MA

Answer: You read it right: The yield on I-bonds, the government’s inflation protected savings bond, is almost zero. That’s right, 0%. The I-bond joins a long list of very safe government backed securities that pay savers from nil to fractional yields.

Here’s the deal: Treasury recently announced that inflation-linked bonds bought between May and October will earn 0% interest for the first 6 months. The same holds for current I-bond owners when their rates reset. Remember, I bonds come in two parts: a fixed rate and a rate that adjusts with changes in the Consumer Price Index. The fixed rate is at 0.10% for new issues. That fractional rate of interest will last for the 30 year life span of the bond. The 0% yield component comes from the link to the Consumer Price Index. Reflecting the worst financial crisis since the Great Depression, the CPI came in at a more than 5% annual rate during the prior 6 month period. However, the yield on I-bonds can’t fall below zero % so that’s what holders will get.

By the way, I still like I-bonds. It’s an insurance policy, a good hedge against the risk of rising inflation once the recovery does set in. Plus, these 30-year bonds allow your money to compound tax-deferred until they’re cashed in. (I-bonds redeemed before the 5 year mark forfeit the 3 most recent months’ interest, but after 5 years that there is no penalty at redemption.) There are no commission costs when buying or selling them.

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