EE Savings Bonds: Now an Even Worse Investment

Financial planners have accurately panned US EE Savings Bonds as a poor investment choice. Now they’re even worse. USA Today reports that newly-issued savings bonds will have fixed instead of variable rates:

Now, interest on EE bonds is adjusted every six months, based on rates for five-year Treasury notes. Starting May 1, investors who buy new EE bonds will earn the interest rate in effect at the time of the purchase for as long as they own the bond. The fixed rate will be based on the 10-year Treasury note.

The change won’t affect outstanding EE Bonds or bonds purchased before May 1. Interest on those bonds will continue to be adjusted every six months. EE Bonds are currently paying 3.25%.

The change also won’t affect the way interest is calculated for inflation-adjusted Savings Bonds, known as I Bonds. Those bonds contain two components: a fixed rate that stays the same for the life of the bond, and an inflation component that is adjusted every six months. I Bonds currently pay a rate of 3.67%.

Treasury made the change to bring interest rates on EE Bonds in line with market rates, Treasury spokeswoman Brookly McLaughlin said…….

There is, however, a floor on how low EE Bond rates can go. Treasury will guarantee that, at a minimum, an EE bond’s value will double after 20 years. That works out to an annual rate of 3.5% for investors who hold their bonds to maturity, Pederson says.

So, 3.5% is the worst you can do (big whoop), but whatever the rate is when you purchase the bond, you’re locked into it (though you can redeem early after a five-year minimum holding period without penalty; if you redeem after more than one but less than five years, you forfeit three months of interest).

At BankRate.com at this very moment, the overnight average for an 18-month CD is 3.93%.

The inflation-adjusted I Bonds mentioned in the USAT excerpt may be worth investigating too. It’s up to you to make choices appropriate for your own situation, and this site does not offer investment advice, yada-yada. To learn more about the different types of US government bonds, including those that many planners would find appropriate in many circumstances, visit the US Treasury Direct web site.

UPDATE: MarketWatch’s Chuck Jaffe weighs in (link requires free registration):
“…maybe I’ll be thinking of buying bonds for grandchildren. But unless something changes the EE bond — or they let the new rules last so long that the situation becomes disadvantageous for the government — chances are I’ll only be thinking about it, because I expect to be better off investing elsewhere.”