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Is Now a Good Time to Buy a Savings Bond?

(May 29th, 2012) In the beginning of May, The Treasury Department announced rates for Savings Bonds purchased between May 1st and October 30th, 2012. They left the rate for the EE Bond unchanged at 0.6%, and decreased the rate on the I bond to 2.20%.

Don’t know the difference between these bonds? Learn more here: EE and I Savings Bonds

Savings Bonds Rate Table

Current Period Last Period Last Change
EE Bonds 0.60% 0.60% November 2011
I Bonds 2.20% 3.06% May 2012

Our View:

EE Savings Bonds are a great long term investment.  You will earn 3.5% when you hold them to maturity. However, they are a terrible investment when held for less than 20 years.  Learn how can you earn 3.5% with an EE Bond.

I Bonds Are A Great Substitute For Putting Money in a CD given current market conditions. They are a safe investment which will protect your money from inflation.  Learn why we think I Bonds will yield more than a comparable CD.

 

Where are EE Savings Bonds Rates going?

The rate on the EE Bond is loosely linked to the the 10 year treasury note. Between November 2011, the last time EE rates were changed and now, the 10 year Treasury has yielded between 1.7% and 2.4%. In other words, the 10 year would probably need to break above this range and trade above 2.4% for the EE rate to be adjusted upwards. There is more risk that rates will be adjusted downward when they are reset again in November. With an EE series bond, the interest rate is fixed for the life of the bond.

Where are I Rate Saving Bonds Rates going?

The I Bond Rate has two components, a fixed rate component which remains fixed rate for the life of the bond and a variable component which changes every six months based on inflation. The fixed component for bonds purchased between May and October 2012 is set at 0.0%. The fixed component has never been set below zero percent (and the overall interest rate is not legally permitted to ever be negative). That leaves the variable component which is based on CPI-U to determine the interest rate on the I bond.  While expectations of inflation vary, most people believe that inflation will remain around 2.0%. If market expectations are right, the yield on the I Bond should continue to be close to the current level of 2.20%

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David Waring

David Waring was the founder of LearnBonds.com and has been a major contributor to the extensive library of investing news and information available on the site. Until the launch of Learnbonds.com in late 2011 there was no single site on the internet catering exclusively to the individual bond investor. This was true even though more individuals own stocks than bonds. Learn Bonds was launched to fill that gap.