TreasuryDirect has a page where program participants (and the general public) may submit questions concerning U.S. Savings Bonds, so on July 12, 2008, I sent a question that asked (in part):

Why was the fixed rate for Series I Savings Bonds set at 0.0% (zero) on May 1, 2008?

And this morning I received the following reply:

Adam,

The Secretary of the Treasury or the Secretary's designee determines the fixed rate of interest. Our Department has no control or input of the earnings rate of savings bonds.

Series I bonds will never decrease in value. The earnings rate will reflect deflation as well as inflation. Even if deflation is enough to offset the fixed rate completely, the earnings rate will not go below zero. Series I bonds will maintain their values until the earnings rate will again produce and increase in value.

Thank you for your participation in the Savings Bond Program.

*******
Customer Service Specialist

I was glad to receive a response to my question, but unfortunately, contrary to the reply that I received, Series I bonds will not maintain value at a 0.0% (zero) fixed rate.

Earned interest is tax deferred for U.S. Savings Bonds, meaning that interest will compound tax-free while the bond is owned. However, once the bond is cashed, the total earned interest is then treated as taxable income. So a 0.0% (zero) fixed rate may preserve the value of the underlying principal while the bond is owned, but the value will actually dip below what is necessary to keep pace with inflation once the bond is cashed and the earned interest is taxed.

In terms of economics, the negative impact of this taxation means that investing in Series I savings bonds paying a fixed 0.0% (zero) interest rate will always be a losing proposition.