These bonds issued by the U.S. federal government are designed to give investors protection against rising prices, which can eat away at the purchasing power of interest payments. But with plummeting energy prices dragging down the Consumer Price Index, these investments' special safety mechanisms can actually work against investors.
Article mentioned some important features that protect TIPS and I-Bond investors from losing money in deflationary period:
TIPS carry a guarantee that at maturity, holders will receive at least the original amount of principal.
The interest rate on I-Bonds can't go below zero. In a deflationary period they will stop paying interest, but the value will never go down.
Submitted: Dec 11, 2008
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Comments Received:
People who buy I Bonds now will at least get the .70% fixed rate. Those that purchased prior to November have a fixed rate of 0%. With deflation, the variable component could go to 0% next March, providing a 0% return. Not that .70% is much better.
Posted: Dec 11, 2008
I think the inflation component could be negative next May. Which might mean I bonds bought now might even see a combined rate close to or at zero.
If the inflation component is negative next May, hopefully the Treasury will bump up the fixed rate. Maybe we'll finally see a decent fixed rate. However, with T-bills and all other cash equivalents having such small returns, they may not see a problem with a 1% or smaller composite rate.
Posted: Dec 11, 2008
Mr.D
(Unregistered)
Now that Dec CPI (unadjusted) is out, and assuming no change in inflation over the next 3 months, the April first inflation component would seem to be -8% !!! The good news would seem to be that we're getting our peak "oil driven" deflation exactly in one 6-month Ibond rate calculating period. i.e. we got +5% inflation in each of the prior two 6-month periods, and all of this big oil deflation is (luck for us bond holders!) caught in one 6-month period (where we will all earn 0%) rather than in 2 6-month periods (who wants to earn 0% for 12 full months on older I Bonds that promise 3.X% above inflation)?
Posted: Jan 16, 2009
