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, a.k.a., 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.)
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.