Why Did the Treasury Department 'Refocus' the I-Bond Program?

Perhaps it signifies nothing, but the timing is suspicious.

Last December, the Treasury Department announced that it was sharply reducing the annual limit on investments in the inflation-indexed series of U.S. Savings Bonds, also known as, I-Bonds, to $5,000 a year as of January 1, 2008 - down from $30,000 a year previously. (The $5,000/yr limit also applies to conventional Savings Bonds as of January 1.)

This is no big deal in the grand scheme of finance, although we can't help but notice that the new lower limit comes at a time when inflation-linked portion of payouts for I-Bonds look set to rise, as per the methodology that ties a portion of the bonds' interest rate to the consumer price index.

The official reason for the reduced investment maximum, as per the Treasury's press release, was rationalized this way:

The reduction from the $30,000 annual limit in effect for both series since 2003 was made to refocus the savings bond program on its original purpose of making these non-marketable Treasury securities available to individuals with relatively small sums to invest.

Refocus? That's an odd way of refocusing if you consider that the new rules have no relevance for "individuals with relatively small sums to invest." If you were investing $5,000 or less a year previously, the new limit has no impact. On the other hand, those who saw fit to put $30,000 a year into I-Bonds now must look elsewhere to satisfy their efforts at inflation hedging. And, in fact, there are other options, including inflation-indexed Treasuries and related mutual funds and ETFs.

As for the Treasury's decision on I-Bonds, could the real motivation be one of limiting the growth in future liabilities tied to paying out a higher interest rates if inflation continues to march higher in the years ahead? It's worth considering as an explanation, all the more so if you consider that I-Bonds can be held for 30 years and taxes on the interest income can be deferred until the bonds are sold.

To be fair, we don't have a problem with the Treasury making decisions that will save the government some money. In fact, we'd like to see more of that kind of thinking in Washington. But what irks us is the effort to whitewash the explanation. Then again, no government agency is going to publicly state that it expects higher inflation, least of all the U.S. Treasury. Under that constraint, the "refocus" explanation is perfectly logical.

Comments

[adan]

i suspect two reasons for the reduction in amt allowed to be placed in i-bonds:

one, as you say, "...I-Bonds can be held for 30 years and taxes on the interest income can be deferred until the bonds are sold." - one of the reasons i still have the tiny bit i still have, plus, within treasury direct, i can sell small portions without having to cash in an entire bond if it was in paper form

which leads to two) i also don't have to pay a commission or fee to cash my i-bond out (other than any time related penalties), which i would need to do if selling an etf (direct commission), tips mutual fund (fees part of the "management costs"), or actual tips (even if only the spread, with no supposed visible dealer fee)

i would guess it's actually # 2 above that's the real reason

the financial industry hasn't much cared for any product for the consumer it can't take a slice from :-)

otherwise, why aren't actual treasuries universally available in anyone's 401's?

[Yiani]

This is just another example of government betrayal of small investors to Wall Street and big business, while saying is doing it to help small investors. How stupid our own government/politicians must think we are!!!

[dr payment]

I agree fully with both blogs & only want to add...

A citizen can purchase $5000 in a TreasuryDirect online account & $5000 in paper at via a financial institution like a credit union or bank for a total of $10,000.

I still think that .gov was sneaky and not thinking in the interest of the public when they made this move!

take care,
(:->)

[Clancy'sPoolroom]

James, agree with your points, but do you think that the Guv is actually honest in the calculation of the inflation rates? I became a big believer in the Series EE Savings Bonds at the end of last year. The reasoning is that the alternatives for "cash" are a bank account or US Treasuries. With the banking situation being what it is, the FDIC having funds for 1.25 cents-on-the-dollar, I figured that the savings bonds cut out at least two or three middlemen: the bank as a creditor to me; the FDIC and their dubious backing; and the FHLB, who gets first dibs on the FDIC funds in the event of a bank default. I also think the various lower demoninations of the savings bonds versus treasuries are both more convenient in terms of only cashing in what you need, lack of suspicion for having something that looks like "your grandmother gave to you" versus a T-Bill/Bond, and the ability to get it exchanged for cash at any bank. Again, I can be pursuaded to go the I-Bond route if you can convince me that the Guv is not cooking the books on inflation calculation index.

[Yiani]

Here is another stealing and insult to the small investor: The fixed rate of the I Bonds has been eliminated entirely as of May 1 2008!!! See below:

www.treasurydirect.gov...

Fixed Rates
I bond fixed rates are determined each May 1 and November 1. Each fixed rate applies to all I bonds issued in the six months following the rate determination.

DATE FIXED RATES*
MAY 1, 2008 0.00%
NOV 1, 2007 1.20%
MAY 1, 2007 1.30%
NOV 1, 2006 1.40%
MAY 1, 2006 1.40%
NOV 1, 2005 1.00%
MAY 1, 2005 1.20%
NOV 1, 2004 1.00%
MAY 1, 2004 1.00%
NOV 1, 2003 1.10%
MAY 1, 2003 1.10%
NOV 1, 2002 1.60%
MAY 1, 2002 2.00%
NOV 1, 2001 2.00%
MAY 1, 2001 3.00%
NOV 1, 2000 3.40%
MAY 1, 2000 3.60%
NOV 1, 1999 3.40%
MAY 1, 1999 3.30%
NOV 1, 1998 3.30%
SEP 1, 1998 3.40%
*Annual rates compounded semiannually