The Treasury just issued a press release announcing that paper savings bonds will no longer be sold at banks and credit unions starting in 2012:
The Bureau of the Public Debt announced today that as of January 1, 2012, paper savings bonds will no longer be sold at financial institutions. This action, which supports the U.S. Department of the Treasury's goal to increase the number of electronic transactions with citizens and businesses, will save American taxpayers approximately $70 million over the first five years.
But savings bonds, introduced in 1935, are not going away. Electronic savings bonds in Series EE and I will remain available through purchase in TreasuryDirect, a secure, web-based system operated by Public Debt – where investors have been purchasing savings bonds, available 24/7, since 2002.
If you already have paper savings bonds, you don't have to worry about converting them or redeeming them before 2012. At the bottom of the press release, the Treasury states: "Those currently holding paper savings bonds can continue to redeem them at financial institutions".
According to the press release, the only way to get new paper savings bonds after 2011 will be by purchasing them with your tax refund. More details about using your income tax refund to buy I Bonds are available at this TreasuryDirect FAQ page.
One thing not mentioned in the press release is what will happen to the annual purchase limit. I assume it will remain the same. Currently, the annual purchase limit for the I Bond is $5,000 at TreasuryDirect and $5,000 for paper bonds (per SSN). So without the paper option, the limit will effectively be reduced to $5,000. The only way to get around this may be to withhold more on your taxes so you will have at least $5,000 in your tax refund that you can use to purchase the paper I Bond. Of course your money won't be earning interest while you are waiting for the tax refund.
Update 7/17/11: I have some new information on the annual purchase limit and on how to buy paper bonds with your tax refund in this thread how to buy paper savings bonds after 2011.
In the last 10 years the Treasury has implemented several changes that have made savings bonds less attractive. One of the worst was cutting the annual purchase limit to one-sixth of what it had been. It used to be possible to purchase up to $30,000 of I Bonds at TreasuryDirect in one year. After this big cut, I was hoping that the Treasury would be a little more generous on how it set the I Bond fixed rate. They actually became less generous with the fixed rates. Since that purchase limit changed, the fixed rates have consistently been under 1.00%, and now it's at zero. They used to be over 3.00% back in 2000.
Even with the zero fixed rate, I Bonds can occasionally be good short-term deals when inflation spikes. I described the details of this in my review of May's I Bonds rates.
Edit 7/14/11: Changed "by one-sixth" to "to one-sixth of what it had been".