LearnBonds.com

Upside Down World: I Bonds Pay A Higher Fixed Rate Than EE Bonds

Rate this post

ee-bonds

Savings bonds are sold in two varieties, I bonds and EE bonds. EE bonds pay a fixed rate of interest until maturity (20 years after issue) and then are guaranteed to double in value. I Bonds pay a fluctuating rate of interest which is tied to inflation. Or, to be more precise, I Bonds have a fixed component which remains constant through the life of the bond and a floating component that tracks the Consumer Price Index (CPI-U).

To see a list of high yielding CDs go here.

On November 1st, 2013 the Treasury Department Announced the rates for newly purchased saving bonds. These rates are applicable for savings bonds purchased from November 1 st, 2013 through April 30th, 2014

Fixed Interest Rate Component

Inflation Interest Rate Component

Total Annualized Interest Rate

EE Bonds

0.1%

———————

0.1%

I Bonds

0.2%

1.18% (changes every six months)

1.38%

These rates are very unusual. (Historical Rate Table)  Never before has the fixed rate component of a newly issued I Bond been higher than the entire interest on a newly issued EE-bond. It almost defies logic.

 

Why would a person buy an EE bond instead of an I Bond?

 

  • The I Bond Pays A Higher Fixed Interest

  • The I Bond Pays The Rate Of Inflation (which historically averages 2% per year)

 

I am convinced that I Bonds currently represent a much better buy than EE bonds but . .

 

There are two possible arguments that could be made for buying EE bonds instead of I Bonds. If inflation is negative, the I Bond could pay zero percent interest in subsequent 6 month periods of time after purchase. When CPI-U is negative, CPI-U is deducted from the fixed component to calculate the total interest rate for I Bonds, with a floor of zero percent. It’s a remote possibility that in the future, the total interest rate on I bonds could be 0.0%. For EE bonds to be the better buy, inflation would have to be negative for a decade if not longer.

The other argument is more plausible. When held until maturity (20 years), EE bonds pay an effective interest rate of around 3.5%. Thus, if you absolutely are sure that you will not need the funds for 20 years, you’re better off buying an EE bonds (assuming the average inflation rate is less than 3.3% during that period time).

An Alternative To Savings Bonds – 5 Year CDs

If your time horizon is shorter than 20 years, CDs may be a better potential investment than either I or EE Saving bonds. If you got Learn Bond’s CD rates page, you can find several 5 year CDs that pay around 2% interest.
 

Learn how to generate more income from your portfolio.  
Get our free guide to income investing here.

 
All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
Avatar

Marc Prosser

Write first comment

Reply

Your email address is not published.

HTML Snippets Powered By : XYZScripts.com