Last month, the Treasury announced that they were significantly reducing the availability of Series EE and I savings bonds, decreasing the maximum allowable purchase from at $5,000 per Social Security number per year (reduced from $30,000), and the new limits took effect on January 1, 2008!
According to the Treasury's announcement, the primary purpose in reducing the limit was to refocus the savings bond program back to its primary purpose - making small denomination
non-marketable Treasury securities available to those with small amounts of money to invest.
Notably, the restriction isn't quite as harsh as it first appears to be. The limit is actually $5,000 each for Series EE and I bonds, and the limit is applied separately to
electronic bonds (held with TreasuryDirect) and paper bonds, so the total annual limit is actually as high as $20,000 (which would include $10,000 each of EE and I bonds, with half of each bond held in electronic form and the other half in paper form).
Nonetheless, the new limit will likely change the way some investors use savings bonds. Investing in I bonds in particular has been popular for some, who wish to receive the return opportunities of having an inflation-indexed return, without the bond price volatility of a market-traded TIPS investment. In addition, I bonds have a great appeal over TIPS because of their far more investor-friendly tax treatment, enjoying tax deferral of annual interest accumulation and avoiding the so-called "phantom income" generated by TIPS.
From a practical perspective, though, I'm not certain how the Treasury intends to enforce the per-Social-Security-number limit. If Mom and Dad buy $5,000 of paper form I bonds for their son for college, and then Grandma buys a $100 I bond for that grandson for his birthday, will the Treasury be tracking the annual purchases and reject Grandma's purchase request? What happens when multiple family members all want to gift EE or I bonds at the same time for a major family event, like a child's bar/bat mitzvah, confirmation, or graduation? Who coordinates the electronic
and paper, EE and I purchases, to ensure that no category adds up over $5,000 in a single year?
From an investment perspective, though, the change means that it's no longer feasible for many investors to hold their inflation-indexed portfolio bond allocation entirely in I bonds anymore. For a married couple that wishes to invest a $500,000 portfolio to include 10% in inflation-protected bonds, they could have formerly bought $25,000 of I bonds in each spouse's name and achieved
the allocation. Now, that allocation would have to be implemented over a whopping 5-year period (and the limit would be further restrictive if they were still adding new savings to their portfolio)! Instead, they would need to be purchasing TIPS, or another inflation-protected fixed income alternative, and the less desirable tax consequences that accompany non-I bond investments.
Of course, redirecting those with more significant portfolios away from EE and I bonds was exactly what the government intended with this change, in its public statement about refocusing savings bonds back to investors that only have small amounts of money to invest. On the plus side, though, a married couple who each purchases their $5,000 of paper form I bonds and $5,000 of
electronic form I bonds can still get up to a total of $20,000 - less than the former limits, but still reasonable broad. Nonetheless, for those who were regularly purchasing I bonds at the former limits, this will feel like a significant restriction.
Thanks to David Jacobs' mailing list "David's Diamonds" for pointing out this new rule.