Net Gains: Is Grandma's Savings Bond a Dud?

An I bond bought in 2000 could pay in total as much as 8.44 percent, given the 3.60 fixed rate and the current inflation-adjusted rate of 4.84 percent.

Observers of the savings bonds program believe the 0 percent fixed rate for I bonds is just the latest sign the U.S. Treasury Department seeks to phase out savings bonds and encourage small investors to, instead, buy Treasury bills, notes and bonds.

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"Combined with the EE bond rate and the reduction in maximum purchase limits, it's like the Treasury is heaping scorn and ridicule on Savings Bond investors," says the Savings Bond Advisor Web site, run by Tom Adams, author of a book by the same name.

Late last year, the U.S. Treasury Department announced a reduction in the limit on annual savings bond purchases from $30,000 to $5,000. That limit applies to each type of savings bond -- paper, electronic, Series EE and Series I -- so, it is possible to accumulate as much as $20,000 in a given year, but that is still down from the previous $120,000 potential.

The move, the Treasury Department said, "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."

It noted that 98 percent of all annual savings bond purchases fall within the $5,000 limit.

Then, in March, the Treasury Department made U.S. Treasury bills, notes, bonds and Treasury Inflation-Protected Securities (TIPS) more appealing to small investors by lowering the minimum purchase amount. Investors now may buy these federal government securities in multiples of $100, down from $1,000.

The lower minimum applies both to marketable Treasuries bought online at www.treasurydirect.gov and in the secondary market from private dealers.

The logical conclusion is the federal government wants small investors to buy more Treasury bills, notes and bonds, but fewer savings bonds. The cost and complexity of selling savings bonds exceeds other Treasuries because many savings bond investors prefer the old paper bonds to buying and holding them electronically.