Are you a believer in savings bonds? Do you think they are a decent investment in today’s economic climate? Well, if you answer yes to either of those questions you may be in for a little bit of a surprise. Today, in fact, it is extremely difficult to make a case for purchasing them for any reason. Take the newer I Bond, which is paying close to nothing right now. And they are the bonds that are indexed to inflation for our protection. Their fixed component of the interest rate is now zero, meaning that is with it for the life of the bond. And the second part that is adjusted semiannually is paying 0.8% as of August 2015. At least the Treasury does not allow the combined rate to drop below zero. Then you can take the older Series EE bonds that are paying a fixed 0.3%. In both cases, you are not allowed to cash in the bond in the first year, and if you cash it in within the first five years, you lose the last three months interest as a penalty.
Now if you are bound and determined to buy a savings bond say as a gift for someone advisors suggest you purchase the Series EE right now. The reason is the Treasury will adjust to price to double to the face amount over a 20 year period regardless of what the interest payments add up to. Meaning that the Series EE has a minimum return of 3.5% regardless of what happens to interest rates in that 20 year period. Of course, if rates rise all savings bonds could become more attractive in nature. It pays to pay attention to what the current rates are on these bonds.
I used to like the I Bonds but with rates being as low as they have been since 2007 I am not as certain in the current environment. In fact, the Treasury has not issued an I Bond with a fixed interest rate over 1% since 2007, and I do believe when rates do go back up they can be attractive once again. But for now I suggest staying clear of the I Bonds. While these bonds are also guaranteed not to have a rate below zero, the actual rate can fall below that of the fixed portion. As an example, an I Bond bought in mid-2001 would have a fixed rate of 3% and an inflation adjustment of -0.8% for a combined rate of only 1.38% according to Kiplinger.
For now those who have cash and do not want to invest in savings bonds I suggest a high-yield savings account with an on-line bank such as Capital One 360 or a laddered certificate of deposit approach to take advantage of rate when they do begin to rise again.
If you have any questions or need more information, please feel free to contact me.
