When the U.S. Treasury changes the rules, that's how.
Case in point: Inflation-adjusted savings bonds.
I used to like them. Even when the guaranteed returns over inflation started dropping from 3.6 percent in 2000 to 1 percent and then to 1.4 percent, which has been the range since 2004. I saw them as such an easy investment to buy and hold and keep your money ahead of inflation by any margin.
Now, I think they're a very poor choice.
Here's how they work. Inflation-adjusted savings bonds pay you a combination of a fixed interest rate and a variable rate that's based on inflation. Twice a year, each May and November, the Treasury tells you what the new rates will be, based on changes in the consumer price index and what's happening in the credit markets. The new rates apply to any bonds sold in the following six months.
Keep in mind that these are 30-year bonds. So whatever the Treasury sets as the fixed rate when you buy them is what you'll get for the life of the bond after inflation. What you earn from the bond will vary with inflation, but that fixed rate will always be your real return for as long as you own the bond.
Last week, the Treasury said the new fixed rate would be zero. Nothing. For the next six months, if you buy an inflation-adjusted savings bond, you get no real return. If you had bought your I-bond a couple of weeks ago, you would have gotten a fixed rate of 1.2 percent,
This was a shock to many, the biggest rate cut since I-bonds were introduced, and basically a sign. The sign says: Savers go somewhere else.
Buying these savings bonds now is a bet on inflation going up and up and up.
How ridiculous. To tie savings to prices blowing up.
Here's the other way to look at this. If you buy a bond now, it yields 4.84 percent, which is a nice rate. That's the inflation rate the Treasury set.
, chief executive officer and founder of SavingsBonds.com, says there's too much attention being paid to the zero fixed rate and not enough to the actual return. "It's a huge rate of interest when you think how safe this investment is," Quinn said. "You have to keep your eye on the doughnut and not on the hole."
Fine. But the government has made it more difficult to take advantage of it.
The Treasury came up with a new set of purchase limits that allow you only to buy $5,000 in paper savings bonds and $5,000 in electronic savings bonds per year per person. The old limit, before January, was $30,000 plus $30,000, which is a more sensible amount for someone trying to save for their children's education or retirement.
So the message here seems to be the Treasury doesn't really want you to sock a lot of hard-earned money in inflation-indexed savings bonds. Besides, they will pay you very little anyway if the Fed manages to get inflation under control.
OK, fine. Let's ask Greg McBride, senior financial analyst at Bankrate.com: What's an investor to do?
If your investment is short term, he said, the best bet may be the highest-yielding certificate of deposit. You can tailor this to your needs. If you need the money in three years, buy a three-year CD.
Why? The other inflation-adjusted options may not fit so well with savers who like super-safe savings bonds. There are Treasury Inflation-Protected Securities, but TIPs "are not a great deal right now," he said. The five-year TIP is paying 0.8 percent above inflation and the 10-year, 1.5 percent above inflation. In addition, TIPs cause you to have some tax issues that make them difficult to hold outside of qualified retirement accounts.
There are inflation-indexed corporate notes, but that takes you away from the safety of a government-backed investment and introduces you to the concept of credit risk, the risk that the company will fail to repay the note.
Super wary savers might not want that.
If your investment is long term, put the money to work in a diversified portfolio of stocks and bonds.
Just not I-bonds.
Harriet Johnson Brackey can be reached at hjbrackey@sun-sentinel.com or 954-356-4614.
I-bond limits
New treasury rules allow individuals to buy only $5,000 in paper savings bonds and $5,000 in electronic savings bonds per year per person.
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