Inflation and the Series I Savings Bond

The Treasury Department has had a Savings Bond program since 1935 to raise funds for the U.S. Government. With the backing of the government implicit these bonds considered among the safest investments in the world. They have not drawn a great deal of attention from investors due to the rates paid on them, which is typically below that of investment grade bonds and longer term U.S. Treasuries. In 1998 the Treasury Department introduced the Series I bond which has a variable inflation-indexed component effectively making it a hedge against inflation. The Series I Bond pays a fixed rate (changed every six months for new issues) of interest and the variable inflation-adjusted portion of interest every six months. In the case of deflation (a CPI rate below 0.00%), the inflation-adjusted portion of interest is zero. Currently, the fixed portion of the Series I Bond is 1.20% and with a trailing inflation rate of 3.06% the Series I Bond is currently earning a rate of 4.26%. The recent rate cuts by the Federal Reserve have made this a more competitive rate with other safe investments. For instance, the 180-day U.S. Treasury is only yielding 3.09% today. It is very likely that the Treasury Department will in fact lower the fixed rate in May 2008 when they adjust if the Fed keeps lowering rates, but investors who buy the Series I Bonds between now and May will receive the 1.20% fixed rate for the lifetime of their bond. Many economists are looking at the high rates of increase in energy and food prices and are beginning to question when “secondary inflation” from these two sectors will in fact drive up wholesale consumer prices. If that does in fact happen, investors who own the Series I Bonds will receive good returns on their investment.

More information about Savings Bonds is available at http://www.savingsbonds.gov/