Updated: May 3, 2013 12:14PM
Don't buy U.S. Savings Bonds. How's that for a patriotic column after the holiday weekend? For years, I took advantage of the July 4th holiday to promote the benefits of U.S. Savings Bonds, reminding readers that even people with small amounts of money could easily and automatically start a regular savings program -- and get current market rates of return. In other words, Savings Bonds were a good deal.
No longer. In recent years, the government has made changes to the Savings Bond program that make them look like a "sucker" investment -- especially Series EE bonds that now carry low fixed rates of return that won't keep up with inflation.
Current bond rates
The traditional Series EE bonds now pay a fixed rate for the life of the bond -- instead of adjusting every six months to keep up with rising interest rates to offset inflation. That fixed rate is based on the general level of Treasury note yields, and a new fixed rate is set every May and November.
Currently, the fixed rate for Series EE bonds is 1.4 percent. If you purchase them before Nov. 1, you'll carry that rate for the first 20 years, which is the original maturity of the bond.
But if you actually hold the EE bond for 20 years, it is guaranteed to reach its "face value" or double the original purchase price. That means your effective yield will be 3.6 percent. That applies only if you hold the EE bonds for 20 years.
Series I bonds -- the "inflation-adjusted bonds" -- have not changed their interest rate formula, but they certainly are no longer attractive. That's because Series I bonds carry a fixed base rate for the life of the bond. Currently, that fixed base rate is ZERO!
Yes, that's right -- the base rate on Series I bonds is NO interest. That's because the formula for calculating the base rate was determined by the very low rate on the Treasury's inflation-adjusted securities earlier this year.
However, the "inflation adjustment" component of the interest paid on Series I bonds is currently 4.84 percent. That adjustment takes place every six months and is based on the Consumer Price Index. That portion of the I-bond rate will change in November. But the current zero base rate plus the inflation adjustment adds up to 4.84 percent until then.
Guard older bonds
It's important to remember that if you have older Series EE bonds or Series I bonds, you might have the greatest deal around. Don't cash them in before you find out what the guaranteed base rate is on your bonds.
For example, in October 2001, I wrote a column suggesting you purchase Series I bonds because the base rate looked like it was about to drop sharply. It did, starting the next month.
I checked my own Savings Bonds, realized I had followed my own advice, and purchased I bonds with a base rate of 3 percent -- just before the base rate dropped to 2 percent. So today, those I bonds are paying 7.84 percent! (The highest base rate since I-bonds were created was 3.6 percent for a brief period in 2000.)
To find the base rate on your existing I bonds, go to www.TreasuryDirect.gov, select the portal for individual investors, and click on Savings Bonds.
Similarly, many older Series EE bonds still have high guaranteed rates. The highest currently in effect is 4 percent. So while current purchasers earn only 1.4 percent, you may still be earning a very competitive 4 percent on your older bonds. The government site will give you that information as well -- www.treasurydirect.gov/in div/research/indepth/ebonds/ res_e_bonds_eerates andterms.htm.
One more point of interest: It's easy to find out what your old savings bonds are worth if you cash them in today. You'll need the issue date and the denomination. Then go to the Savings Bond home page at Treasury Direct.gov to use the handy calculator. You may be amazed at how the value has built up -- and will continue to do so for 30 years. So think carefully before you cash them in.
The minimum purchase for Savings Bonds is still $25, if you buy them directly from the Web site. If you buy through a bank, it's $25 for E bonds and a $50 minimum for I-bonds. Employee programs allow you to purchase Savings Bonds in smaller amounts.
Series EE bonds are sold at a discount, meaning the interest builds up over the years, until you cash them in and pay taxes on the accrued earnings. Series I bonds are sold at face value, and the interest builds up on top of that purchase price. But you do not have to pay taxes on the earnings until you cash them in. And there's a tax break for families with income under $100,000 who use bonds purchased after 1989 for college tuition.
This year, the Treasury Department lowered the maximum purchase of Savings Bonds in one year to $5,000 made through TreasuryDirect.gov, and an additional $5,000 in paper bonds purchased through a bank.
That hardly makes sense. You'd think the government would want people to buy bonds. But by doing away with floating rates on EE bonds, and limiting the purchase amount, and encouraging the use of paper bonds, the government is an oxymoron at work!
So if you have older Savings Bonds paying higher guaranteed rates, then hold on to them. But think twice about buying new bonds, especially EE bonds as gifts or for your own future. That's my patriotic message this holiday weekend -- and that's the Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate. Copyright Terry Savage Productions Ltd.