US  Savings Bonds – The Safe Place to Save Your Money

US savings bonds series EE and I are a safe haven for our money. The bonds are guaranteed by the full faith and credit of the US government; that means the tax payer. There are bills which are shorter term debt and bonds which range from 10 to 40 years in duration. Series EE bonds pay a fixed rate of return re-set every six months on May 1 and November 1 of each year. Currently, the bonds pay 2.80% and will be reset May 1. This is based on a market based securities rate set at 90% of the preceding six month 5 year Treasuries security. The bonds can be bought in paper form or electronically. Bonds are liquid. One forfeits the latest three months interest if sold before five years. The series EE bond is guaranteed to double within 20 years of its origination, and continue to earn interest at a fixed rate. If it does not then the Treasury will make a onetime adjustment to guarantee it. The bond is tax free for state and local taxes and there is no federal tax due until redeemed.

The paper bonds can be purchases up to $5000 per year per person. The bonds come in increments starting at $50 to $10,000 and are bought at half face value. They are issued as paper certificates. The electronic bonds are bought at full face value and issued to the account designated. There are advantages and disadvantages to each and one should investigate them to determine which you should buy.

Series I bonds can be bought at any value to the penny and at full face value if bought electronically. Otherwise they are similar to Series EE bonds. They can be bought as paper issued certificates at full face value. People with a social security number or are US citizens can own series EE and I bonds.

Who should own Treasury bonds? People who need to preserve capital. Remember that in the recent financial panic short term Treasury bills were paying a negative return. However, people, out of fear, bought them. Series EE and I bonds are paying less the 3% now. Security and safety is guaranteed but the rate of return is low to non-existent. If one needs growth, bonds are not the place to be. Stocks outpace bonds dramatically over the long term as Jeremy Siegel showed in his book ‘Stocks for the Long Term.’

Currently, long term treasury prices are high. When inflation comes back, these prices will start to fall as inflation goes up. So this is not the time to buy bonds unless you hold them to maturity. You will be guaranteed your capital, but if you sell before maturity you could lose money if rates increase. If rates drop, bond prices go up and you will make money on the bond if you sell. Bond price and interest rate are inversely related. We observe that higher the interest rate that the bond offers, then the lower the bond price. If one needs to get a better return and have safety, one should consider municipal bonds or the higher return from corporate bonds. Risk increases though in these bonds.