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May 2nd, 2009 (Modified on May 4th, 2009)

US savings bonds: now at 0%

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The perfect companion to zero-percent financing — zero-percent savings:

The U.S. Treasury Department set a zero percent earnings rate Friday for its Series I savings bonds bought from May through October 2009.

The earnings rate includes a fixed rate, set at 0.1%, and the annualized rate of inflation over the next six months, which was -5.56% between September 2008 and March 2009. The earnings rate is never less than zero.

This is the first time the earnings rate has ever been zero for the I Series.

The idea behind I Series savings bonds is to protect the value of your cash from being eaten up by inflation over the life of the bond; in fact, they’re often touted as “inflation-adjusted” bonds. The rate is set by blending a fixed rate of return, which remains the same throughout the life of the I Bond, with a variable rate adjusted twice per year based on the Consumer Price Index (CPI-U).

A lot of small-time investors like the I Series bonds; you can buy them at the bank with no commission, and you can buy them in small amounts. However, a zero-percent return isn’t very appealing. What sorts of alternatives do you have? Motley Fool has a suggestion:

At the current fixed rate of 0.1%, there is little reason for investors to purchase I Series Savings Bonds given the alternative of purchasing Treasury Inflation Protected Securities (TIPS) at auction through Treasury Direct. Treasury Direct offers investors the ability to participate in regular auctions without paying any commissions. The Treasury holds regular auctions for TIPS of various maturities. TIPS may also be purchased on the secondary market through a broker.

Read all of it, though, because there are tax considerations involved.

But back to the I Series bond: something doesn’t quite add up. Social Security cost-of-living increases are also based on the CPI-U, and last October it was announced that seniors would enjoy the largest cost-of-living increase in more than 25 years for 2009:

Seniors who have recently seen their nest eggs tank are finally getting a small break. Social Security benefits will increase 5.8 percent next year, the largest cost-of-living increase in more than 25 years. …

The adjustment is more than double the 2.3 percent increase in benefits seniors received this year and the sharpest increase in checks since 1982, when benefits jumped 7.4 percent. The increase is tied to the consumer price index, a measure of the prices paid by urban consumers for goods and services.

Perhaps there’s a lag factor as regards Social Security, because the Congressional Budget Office has warned that there probably won’t be any cost-of-living increases for Social Security beneficiaries in for the next three years.

Perhaps someone understands these things better than we mere mortgage-market mavens; if so, please enlighten us in the comments.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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