I Bonds Savings Bonds hit 0% rate for first time

— -- For the next six months, a new inflation-adjusted Savings Bond will provide exactly the same investment return as the space beneath your mattress.

Treasury announced last week that inflation-adjusted Savings Bonds purchased from May through October will earn 0% for the first six months they're held. This is the first time I Bond returns have fallen to zero since Treasury started issuing them in 1998, says Daniel Pederson, author of Savings Bonds: When to Hold, When to Fold, and Everything In-Between.

Consider this the downside of $2 gasoline. The I Bond consists of two components: a fixed rate that stays the same for the life of the bond and an inflation rate that's adjusted every six months. The inflation component for I Bonds issued from May through October is based on the change in the consumer price index from September through March.

Primarily because of sharp declines in the cost of energy, consumer prices fell at an annual rate of 5.56% from September 2008 through March 2009. The decline in the inflation rate will vaporize the 0.10% fixed rate for I Bonds issued from May through October. The drop will also wipe out the interest on older I Bonds with much higher fixed rates, says Tom Adams, author of Savings Bond Advisor. The 0% interest rate will affect "every I Bond that's ever been issued," he says.

The only good news is that I Bond owners won't lose any money. Under the Treasury formula, the earnings rate on I Bonds will never fall below zero. If you already own I Bonds, you won't earn any money during the relevant six-month period, but you won't lose any of your principal.

This may come as small consolation to I Bond owners who are facing six months of oblivion. But before you ditch your I Bonds, there are a couple of factors to consider:

•When your inflation-adjusted rate will reset. The inflation component of your I Bond is adjusted every six months, depending on when you purchased your bond. If you own an I Bond that was purchased in April, for example, your rate won't drop to zero until October, Adams says. Until then, the bond will continue to earn an inflation-adjusted rate of 4.92%, plus the fixed rate that was in effect when you purchased your I Bond. Sell now, and you'll give up five months of above-average interest.