Inflation-indexed bonds have been promoted by the U.S. Treasury as a way to beat inflation; they they are set up to have a fixed rate of return on top of an interest rate equal to the Consumer Price Index inflation rate. Now, because of the "flight to quality" across the country, so many people want these inflation-indexed bonds that the fixed rate has fallen to ZERO. That has never happened before. As Bloomberg reports:
"The so-called earnings rate on the bonds issued between May and October, which is tied to the rate of inflation, is 4.84 percent, the bureau said in a press release. The fixed rate, on top of the compensation for rising consumer prices, is officially 0.00 percent, down from 1.2 percent when the Series I was last issued, in November. That means investors get no returns on their investments other than compensation for inflation..."The next point to understand is that the Consumer Price Index grossly underestimates the actual rate of inflation, as I blogged earlier this week at THIS LINK.
Thought-provoking, if not just a bit scary.