Why You Should Hold Off on Buying Savings Bonds

With interest rates scraping bottom, it’s tough to make a case for buying savings bonds now. New I-bonds are yielding zilch, combining a fixed rate of 0%, which lasts the life of the bond, with an inflation rate, reset semiannually, that has dipped to –0.8% (the Treasury doesn’t allow the combined rate to drop below zero). Series EE bonds pay a fixed 0.3%. You can’t redeem either type of bond within a year of the purchase date, and if you pull out the money before five years have passed, you’ll be penalized the last three months’ interest.

If, however, you’re determined to put money into a savings bond—say, because you want to give one as a gift—go with an EE bond, advises Jackie Brahney, marketing director of SavingsBonds.com. The Treasury will adjust the bond’s value to double the original issue price after 20 years if interest payments have not raised the bond’s value to that level. That’s a minimum return of 3.5%.

Because the fixed-rate component on new I-bonds is so anemic (the Treasury hasn’t issued one with a fixed rate of 1% or more since 2007), the bonds offer little opportunity for growth in your money’s buying power, says Greg McBride, chief financial analyst for Bankrate.com. If you own an I-bond, you don’t have to worry about a loss of principal because the combined rate never falls below 0%. But the combined rate can fall below the fixed rate. A bond that was purchased in May 2001, for example, has a fixed rate of 3%; accounting for the –0.8% inflation rate, the current combined rate is only 1.38%.

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For now, most savers who want a safe place to park cash are better off using a high-yielding savings account or certificate of deposit.