Have you noticed what the interest rate TIPs now pay?
How about Zero?
Thanks to a flight to safety, the fixed rate on the
newest issue of Series I inflation-indexed savings bonds has for the first time fallen
to zero.
Heres’ the Treasury Department press release:
I Bond Earnings Rate 4.84%, Fixed Rate 0.00%
The earnings rate for Series I Savings Bonds is a combination of a fixed
rate, which applies for the life of the bond, and the semiannual inflation rate.
The 4.84% earnings rate for I bonds bought from May through October 2008 will
apply for their first six months after issue. The earnings rate combines a 0.00%
fixed rate of return with the 4.84% annualized rate of inflation as measured by
the Consumer Price Index for all Urban Consumers (CPI-U). The fixed rate applies
for the 30-year life of I bonds purchased during this six-month period. The
CPI-U increased from 208.490 to 213.528 from September 2007 through March 2008,
a six-month increase of 2.42%.
Bloomberg observed:
"Financial market turmoil has caused the fixed rate on the newest issue of Series I inflation-indexed savings bonds to fall to zero for the first time, according to the U.S. Treasury’s Bureau of Public Debt. Investors still get a return on the investment as long as consumer prices rise, because the government pays additional interest in lockstep with inflation.
The fixed rate’s decline to zero reflects the decline in returns in money markets in the aftermath of the credit collapse, said Kim Treat, a spokesman for the bureau in Washington. The government promotes the savings bonds as "low- risk” investments for individuals that protects them against inflation.
The so-called earnings rate on the bonds issued between May and October, which is tied to the rate of inflation, is 4.84 percent, the bureau said in a press release. The fixed rate, on top of the compensation for rising consumer prices, is officially 0.00 percent, down from 1.2 percent when the Series I was last issued, in November.
That means investors get no returns on their investments other than compensation for inflation. The fixed rate has never fallen so low since inflation-indexed savings bonds were introduced in the 1990s, Treat said."
All things considered, that’s rather astonishing . . .
>
Sources:
Series EE To Earn 1.40% Fixed Rate, When Bought From May Through October 2008
Treasury Direct, May 1, 2008
http://www.savingsbonds.gov/news/pressroom/pressroom_comeeandi0508.htm
U.S. Offers 0% for First Time on Inflation-Linked Savings Bonds
Vincent Del Giudice
Bloomberg, May 1 2008
http://www.bloomberg.com/apps/news?pid=20601213&sid=adVhzxy3ygcM&
Everything is astonishing, nowadays.
That’s what happens when you reduce real interest rates below 0%.
TIPS are GYPS
Why would anyone want to be paid on the basis of a rigged inflation number. Nuf said.
Now for the tough question.
Can the fixed rate go negative??? and are you sure they won’t?
Talking about a rigged game.
30 yr. 0% fixed rate return, that is not safety, that is a shame. :(
We are in the worse negative cycle in 50 years for sure. People just don’t realize it yet.
Economic stimulous, after retail, ends up in the hands on Asia. Hasn’t anyone thought of this?
We need US people to ONLY BUY and ONLY MANUFACTURE in the US again to get out of this death spiral.
TIPS aren’t zero. I-Bonds are zero. They’re different.
Onset of deflation.
That’s too funny. An inflation adjusted savings bond that doesn’t save since government inflation statistics are understated. Take that in the butt you silly stupid savers.
The federal government’s policy message is stop saving and spend! spend! spend!
Funny the author didn’t mention one still has to pay taxes on their inflated return of principle.
Barry my comment is you have the most informational financial blog on the planet. Sometimes it seems like info overload, but keep it up. Thanks!
Repeating what John Vogel said. TIPS and I Bonds are two different instruments. I Bonds purchased in the next six months pay zero fixed plus inflation. Don’t like zero? Don’t buy them. I Bonds purchased before May 1 still pay higher. Real rates on TIPS are still positive.
“That means investors get no returns on their investments other than compensation for inflation.”
Actually when adjusted for “real” inflation, I-Bonds are a losing proposition. Just like TIPS.
Everybody who lends the government or anybody else money for 0.00% is stupid. If you want to hedge against inflation buy gold. It is fast approaching new attractive entry levels.
“Everybody who lends the government or anybody else money for 0.00% is stupid.”
Ever heard of a tax refund?
:D
It says something about investment alternatives these days if people are willing to put their money where they are guaranteed to fall behind–and they consider that the “safe” investment.
0% may not be such a bad thing on second thought. What if the market ends up going down another 20%? That 0% rate would look pretty darn good.
John:
Although I think the market will go down in the short term, it is unlikely that the market will be less than it is now in 30 years.
To put it in perspective, the DOW close on May 1st, 1978, 30 years ago, was 844.33.
Of course in the long term market will go up as we reflate.
But first we must deflate after years and years and years of unmeasured inflation.
You can see it already. Housing inflation is now deflating. Now also Ag, metals, medical and energy are following the deflating trend.
Most people in the market are not aware. Corporate profits have also been inflated as they profit off of the asset rises.
Banks who can’t take further asset deflation will be forced to sell other assets including equities. This is when it will get bad.
It should blow up within 2 years. I’ll sit out of the market for those years and pay off debt instead. If I’m wrong I paid off debt so I win, if the market does fail in the short term I get a twofor.
Savings bonds are not “30 year bonds” in the usual sense of the term. They are, in fact, redeemable at any time after 12 months from the month of issue.
Believe it or not, buying these may make sense if you believe that (1) inflation will continue to be high in the next six months, and (2) interest rates on safe investments will continue to be low. They’ll still beat the 3% or so you’re lucky to get on 12 month CDs these days.
Zero? Then, they should put Bush’s picture on them.
This is simply crazy… interest rates going to any amount will drop the value, guaranteeing a loss.
Interest rates in a time of liquidity being wiped out and credit being suspect ought to sky-high. Cash ought to be king… anything else seems flat nuts.
As far as future developments, I suggest this information from the Treasury Borrowing Advisement Committee of value:
http://www.ustreas.gov/press/releases/hp945.htm
Here is a quote:
“The Committee recommends that the Treasury review its issuance calendar and increase the size and the frequency of existing coupon issuance over the coming quarters in addition to the near-term solution of adding a year bill. Several members noted that the increased reliance on Treasury bills, as the deficit has deteriorated, has shortened the average maturity of the debt, and that steps should be taken to arrest this trend, if not, to purposefully reverse it.
The majority of members believe that the addition of the year bill combined with increases to the size and frequency of existing coupon debt over coming quarters will still not be sufficient to satisfy the increased financing needs of the Treasury over the intermediate and longer term.”
Seems eveyone is looking to borrow and few are in the lending mood.
I don’t see a problem with this. I think it’s the market saying something. The 0% fixed rate says people are ok with getting the CPI-U inflation rate as an interest payment. If everything in the CPI-U goes up (or keeps going up) while all financial assets are deflating, the CPI-U investment return could be a decent investment. And the inflation rate resets every 6 months. If commodities keep going up (in the next 30 years), it will translate into the CPI-U, just maybe not 1 for 1. And if/when financial firms start going bust and debt defaults in large numbers, stocks will take a hit. Higher inflation will mean fixed rate treasuries take a hit. What if the yield does go negative?
Used to be able to buy up to $10,000 max per year in I bonds. Now you are allowed to only buy $5,000 max per year.
If you bought your I bonds when the fixed rate was 3 percent or better, you are making a wad .. over 7 percent