An amazing thing happened: Americans are buying I-Bonds instead of EE series savings bonds. During the last eleven months, there have been $1.51 Billion of I bonds purchased, versus $356 million dollars of the EE series. Put another way, for every $1 worth of EE series savings bonds purchased, there was over $4.00 of I Bonds purchased. This represents a major change over the previous year, when $990 million of I bonds and $702 million of EE bonds were sold.
To see a list of high yielding CDs go here.
EE bonds pay a fixed rate of return. The current rate of return for newly purchased EE Bonds is 0.20% which is fixed for the life of the bond. Newly purchased I Bonds pay a floating rate which is currently 1.18%, however that rate changes every six months. Which would you prefer earning 0.20% or 1.18%?
(Little Known Secret – EE Bonds when held for 20 years pay 3.5% Interest)
The yield on I bonds is adjusted every six months in direct proportion to the CPI – U (a measure of inflation which you can learn more about here). If you think inflation is around the corner (like bond guru Bill Gross), i bonds provide you with an opportunity to earn more interest when it happens. However, it should be noted that the yield of an I bond can go all the way down to zero should there be no or negative inflation.
While i bonds are a great product, the marketing for them is very limited. There is no one that makes a profit by promoting them. However, the personal finance community has been doing a great job creating awareness of the benefit of i bonds. I think the sentiments of the personal finance community are nicely summed up by Clark Howard in the article, “Series I bonds are a good deal — for now”:
In the past, I’ve spoken with great enthusiasm about Series I U.S. savings bonds. Throughout the late 1990s and early last decade, they were a phenomenal deal…..But over the last several years, I hadn’t really been talking about Series I bonds because they weren’t as good of a deal. Recently though, I read a post on my Clark Stinks messageboard and somebody pointed out that their time has again come.
What makes now different than a few years ago? The main alternative to i Savings bonds, a certificate of deposit, is paying a very low rate of interest. If the inflation rate averages just two percent over the next five years (which is a low estimate), the i Bond would be a better investment than a top yielding five year CD. Shorter length CDs make the comparison even more attractive for i Bonds. As John at My Family Finances says:
Boilerplate explanation aside, interest rates are currently more than double most of the best savings/CD interest rates. Until October 2012, bonds are earning at a rate of 2.2 percent. This is an astronomical return for a safe investment.
I want to dwell on the word “safe”. Savings bonds are backed by the government of the United States. There are lots of investments that pay higher yields, however most of them don’t come backed by the federal government. For most investors, if you want government protection, you need to put your money in an FDIC / NCUA insured bank account, buy saving bonds, or treasuries. The IRS even encourages taxpayers to get i Saving Bonds with their tax refunds. Five Cent Nickel proudly announced:
Once that payment cleared, I then filed our return along with IRS Form 4868 requesting the savings bonds. A few weeks later, the bonds arrived in our mailbox.
I want to congratulate all the bloggers mentioned above for getting the word out about i Saving Bonds. However, I would also like to add a note of caution. i Saving bonds are a great place to safely store cash and have your returns keep up with inflation. However, most of us (except the extremely rich) need our money to grow at pace greater than inflation. I think i Saving bonds are a short-term investment decision but, not a long term retirement strategy.
For more information, visit our savings bonds section.