Dedicated to Deposits: Deals, Data, and Discussion

Treasury Slashes Annual Purchase Limits for Savings Bonds

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It has been a while since I reported on US Savings Bonds. Their rates haven't been competitive when compared with CDs in the last few years even if you consider the savings bonds' special tax treatment. The US Treasury announced a change last week that will make savings bonds even less attractive. Starting in 2008, they're reducing the annual limit on savings bonds purchases from $120,000 to $20,000. This limit includes $5,000 for I Bonds online, $5,000 for paper I Bonds, $5,000 for EE Bonds online and $5,000 for paper EE Bonds.

The I Bonds did have a few occasions in the past when they were good deals. In October 2005 there was a good short-term buying opportunity for I Bonds due to a spike in inflation. Besides that time, I Bonds haven't been a good deal since the Treasury significantly reduced the I Bond fixed rates in 2001 and 2002. As you can see from my I Bond rate my table, fixed rates were as high as 3.60% in 2000. For the last four years, the fixed rate hasn't been over 1.40%. Currently, it's 1.20%.

For those not familiar with I Bonds, the fixed rate stays constant until you redeem the I Bond. Every six months from the purchase date a new inflation component is added to the fixed rate to form the composite rate. The current inflation component rate is 3.06%, and the composite rate is 4.28%. For more details on I and EE Bonds, refer to this TreasuryDirect page.


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Comments
14 Comments.
Comment #1 by Sam (anonymous) posted on
Sam
Could the housing mess have something to do with this? Is this the Treasuries way of forcing people to keep money in unsecure/unsafe banks vs. government backed bonds?

I find this highly suspicious that this is happening now: weak US Dollar, billions lost in foreclosures, banks going under, etc.

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Comment #2 by Anonymous posted on
Anonymous
Of all the things possible -- reducing the limits is the strangest thing US Treasure could have done.

More logical would have been to increase the limits, so this move looks very odd to me……..

Actually I just realized the reason for this action: if one buys I-Bonds she limits her exposure to inflation. Given that the treasury will continue to print money and therefore increase inflation – it would be natural action for treasury to take actions to limit its liability to compensate for that [inflation].

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Comment #3 by Anonymous posted on
Anonymous
Wow, what is going on in the Treasury Dept?

I whole heartedly aggree with the priviously posted comments.

Some thing is going on that we, the public, are not being told.

Could hyper inflation be on the way? Or is this a move by big business and our government (one and the same I think) to force people to put their hard earned money in the stock market to be gobbled up by Wall Street's insiders?

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Comment #4 by Banking Guy (anonymous) posted on
Banking Guy
Another possible motivation at the Treasury may be to reduce the competition that I Bonds give to banks and brokerages.

If I Bonds had a rate close to CDs and didn't have significant purchase restrictions, they would be very attractive alternatives to what banks offer since savings bonds have so favorable tax treatment.

With the low fixed rates and now with the very low purchase limits, savings bonds can't compete. The Treasury's management may be under pressure not to make savings bonds too competitive.

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Comment #5 by Weiwen Ng (anonymous) posted on
Weiwen Ng
on one hand, I know that stocks are a better long term investment. everyone who has an SSN and earned income can open an IRA and buy a stock, bond, or balanced mutual fund, or a CD, or a bunch of other investments. everyone should do so.

however, a lot of people aren't comfortable investing. Savings bonds are good for whoever doesn't feel comfortable in the stock market, which is a lot of people right now. stable investments like these are a good addition to anyone's portfolio in any case.

however, as others have said, the Treasury now doesn't seem to be acting in the best interests of American citizens. now, the Treasury's main job is to raise money to fund the operations of the US government. but, it would be nice if they could offer smaller consumers a reasonable deal. if they're going to cut maximum savings bond investment amounts, can't they also raise the darn rates?

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Comment #6 by Banking Guy (anonymous) posted on
Banking Guy
That's a good point. Hopefully in May, the Treasury will do a major increase to the I Bond fixed rate. That would show that they are interested in helping the average saver. But I'm not going to hold my breath.

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Comment #7 by Anonymous posted on
Anonymous
Sam - As long as you keep less than $100k in any one bank, your bank deposits are exactly as safe and secure as the savings bonds: both are backed by the full faith and credit of the US Government.

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Comment #8 by Sam (anonymous) posted on
Sam
Anonymous, FDIC is an insurance pool and NOT backed by the US Government, this is a really WRONG assumption.

Is Allstate backed by the government? Is State Farm backed by the government?

No, they charge premiums and invest those funds to provide a pool of insurance.

FDIC can easily go under if major banks start failing.

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Comment #9 by Anonymous posted on
Anonymous
Why do people make such comments?

Does State Farm Insurance have a $30 billion line of credit at the United States Treasury? (12 USC 1824(a))

Does Federal Law (12 USC 1824(b)) authorize Allstate insurance company to sell debt obligations through the Federal Financing Bank?

Does federal law exempt notes and obligations issued by State Farm or Allstate from federal income tax (18 USC 1825(a))?

Does federal law say the following about the debts of Allstate or State Farm?
"(d) Full faith and credit
The full faith and credit of the United States is pledged to the payment of any obligation issued after August 9, 1989, by the Corporation, with respect to both principal and interest, if—
(1) the principal amount of such obligation is stated in the obligation; and
(2) the term to maturity or the date of maturity of such obligation is stated in the obligation." (12 USC 1825(d))?

Why do people who know absolutely nothing about how the FDIC works feel obligated to post authoritative pronouncements about it?

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Comment #10 by Anonymous posted on
Anonymous
The reference to 18 USC 1825(a) in the previous post should be 12 USC 1825(a).
Sorry.

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Comment #11 by Banking Guy (anonymous) posted on
Banking Guy
About FDIC, please refer to this FDIC webpage:

FDIC insurance is backed by the full faith and credit of the United States government.

and

Historically, insured deposits are available to customers of a failed bank within just a few days. Since the start of the FDIC in 1933, no depositor has ever lost a penny of insured deposits.

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Comment #12 by Anonymous posted on
Anonymous
The "F" in FDIC stands for Federal. It is an insurance pool, but it is backed by the federal government. If enough banks failed, the federal government would pump more money in the FDIC to keep it solvent. Otherwise, the financial system would collapse...sort of like what would happen if the gov't defaulted on its savings bonds.

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Comment #13 by Anonymous posted on
Anonymous
So how would the government back a bankrupt FDIC? Probably by inflating the money supply further by borrowing even more money (or possibly even just printing currency "because of the banking emergency"). I think they legally have six months to pay off the FDIC insured (no matter what they say about "historically"). The resulting inflation during those months would substantially reduce the value of your FDIC insured savings. I-Bonds that would protect the purchasing power in the inflation this would cause would be the safe haven that investors would likely flock to. The new limits should prevent that from being much of an option except for small amounts of money.

Other benefits to the government are that by lowing the limits by six times they lock in a lot of the low interest loans they got in the past (as low as 1% base rate on I-Bonds) and prevent the flipping of those low base rate accounts that will have their five year (3 month--interest penalty) phase ending May 2008. The May 2003 base rate was 1.1%. This would leave the Treasury free to offer a better base rate to new small investors without those who bought the low base interest I-Bonds from flipping many of them for new I-Bonds. Of course, those who purchased substantial amounts of I-bonds at low rates may have only done so because they trusted the Treasury Dept. wouldn't change the rules in the middle of the game as they have now done. If inflation starts to rampage again (as seems likely to be the preferred way out of the huge government deficits) the Treasury is unlikely to need to give any base rate at all on I-Bonds in order to sell huge numbers of them (in the unlikely event they will be available at all at that time).

The real danger to I-Bond investors (and Social Security recipients) is likely to be manipulation of the CPI so the inflation doesn't look as bad as it really is. The use of so-called "Core" CPI we keep hearing about right now might be getting you used to this new useless method for tracking real inflation. Congressional approval is not necessary for the Treasury to mess with the CPI and it could save billions in payments to SS recipients and I-bond holders if they do so (without even having to call it a tax rate increase). Get the word out to those who will be taxed by CPI cheating so they are watching closely and are ready to revolt in a big way against any such moves to change the CPI any further. This is likely to be attempted in more small steps taken for "good reasons" (as has already been done to the CPI).

One more benefit (to the government) of the lower Savings Bond limits is that they will get the tax money much sooner on the other government inflation hedge available (TIPS).

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Comment #14 by Anonymous posted on
Anonymous
I dont get the conspiracy theory. Why cant people just put the excess over $5000 in TIPS? Other than the tax issues, isnt it basically the same thing?

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