Are Savings Bonds Worth It?

by on September 7, 2011

18 years ago I started buying EE saving bonds for my nephew.  Back then, there was no online trading and buying stocks for someone else seemed impossible, so it seemed like the logical choice.  A few years before that, I had cashed in the savings bonds that my parents bought me to pay for college.  My parents had paid half face value, and in 18 years, they had doubled to full face value plus a little more.  I figured I’d do the same thing for my nephew.  Well, he turned 18 this year and I found out that for each $100 series EE bond I bought (for $50), that they had failed to even reach face value.

With that said, I thought I’d do a little research and put together some charts on historic rates for both the series EE saving bonds and the I series savings bonds.  The question being, do savings bonds make a good investment?

There are currently two series of savings bonds available for purchase.  Series EE and Series I.  Series EE bonds must be held for at least one year and earn interest at a fixed rate for as long as you hold them, for up to 30 years.  They are guaranteed to double in value after 20 years.  The current fixed rate rules have been in place since 2005 and the chart below shows the fixed rates that the bonds are paying.

Series I saving bonds offer a variable rate that has a fixed rate component and an inflation component.  In effect, they pay a fixed rate, which is currently zero percent, plus two times the most recent semi-annual inflation rate.  Because inflation rates have changed a lot in the past 6 months, the interest rate has gone from less than 1% to 4.6% in just six months, even though treasury rates have gone down.  See the following chart for the history of series I interest rates.

So, in looking at the historical rates there are a few observations.  Series EE bonds have a very low fixed rate and the Series I bonds have a variable rate that can fluctuate quite wildly.  In my opinion, if you are going to be investing for close to 20 years, you are better off buying stocks or mutual funds.  However, there are few reasons that savings bonds are useful.  For example, if you want to help someone else save for college, and they are either an infant, or their parents do not have an investment account for them, you can purchase bonds for them and at least be guaranteed a higher return than a savings account.  Also, the series I returns are inflation adjusted, so they are a great hedge against inflation.  Because they are variable rate, they will participate in higher future returns if treasury rates rise, which they are bound to do, as they can’t go much lower.

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