Wikinvest Wire

Wither the I-bond?

Sunday, May 03, 2009

There is something to be said for the wisdom of Will Rogers wherein the return of his money was more important than the return on his money. But, interest rates are now reaching ridiculously low levels, particularly the "inflation protected" government I-bonds, now that short-term inflation has turned decidedly negative. This WSJ report has the details.

Friday, the Treasury Department said these inflation-linked bonds that are purchased between May and October will earn 0% for their first six months, the first time rates have hit 0% since the bonds were issued in 1998. The announcement also affects current I-bond owners, whose interest rate drops to 0% the next time their rates reset.
Rates on I bonds, whose maturities are all 30 years, have two parts: a fixed rate, now set by the Treasury at 0.10% for new issues and which lasts for the bond's life, and the inflation adjustment, which reflects the change in the Consumer Price Index over a six-month period. Since that inflation adjustment worked out to a negative 5.56% annualized rate for the September-to-March period, the fixed-rate portion of every I bond will be wiped out during its next six-month rate period.
The good news? Rates can't go below zero.

So, even if you are a retiree whose medical expenses continue to skyrocket, whose food bill continues to rise, and whose heating bills have yet to decline, at least you won't have any less money than you started with when you cash in your bonds.

This week's cartoon from The Economist: IMAGE


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