Americans have never been more interested in savings bonds than they are right now. With all the hype surrounding a savings bond that recently offered a guaranteed 9.62% annual interest rate for the first six months after issue, investors have plowed billions of dollars into the U.S. Treasury-backed securities. Even as the rate on new series I savings bonds has fallen to 6.89%, there are reasons to be even more excited about their use for long-term investors.
Even as one type of savings bond saw its rate drop, another enjoyed a rise in its interest rate. Yet series EE savings bonds still don't offer the value you can get from other types of investments, and it makes sense for investors to steer clear of them for now.
Two types of savings bonds
The Treasury currently offers two different types of savings bonds. Series I savings bonds, also known as I bonds, have an interest rate that's tied, in part, to the rate of inflation. Every six months, the Treasury looks at the change in the Consumer Price Index and uses it to set a new rate. That rate not only helps determine what newly issued I bonds will pay, but also gets incorporated into the interest-rate adjustments that I bonds go through twice a year in the 30 years before they mature.
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Investors in I bonds, therefore, have to be prepared to see the rate they earn on their investment change during their ownership. Indeed, past swings in rates have been dramatic, with some particularly deflationary environments leading to a period of I bonds earning no interest at all.
By contrast, Series EE savings bonds don't have any inflationary component, and investors don't have to worry about the uncertainty that comes with variable interest rates. EE bonds have their rate set when they're first issued, and that rate stays constant throughout the maximum 30-year period before the bond matures.
A big boost in EE bond rates
The Treasury sets EE bond rates in part by looking at prevailing interest rates in the bond market. As a result, it's not surprising to see a big jump in the EE bond rate recently, as bond yields have soared.
Indeed, the Treasury's 2.1% rate on EE bonds for sale between November 2022 and April 2023 represents a huge increase from past EE bond rates. Dating back to late 2015, the EE bond rate had remained at a rock-bottom 0.1%, reflecting near-zero interest rates on Treasury bonds and offering almost no incentive for savers to buy EE bonds.
Just about the only reason to buy EE bonds in the past came from a special guarantee the Treasury made. Regardless of the fixed rate, if you hold EE bonds for 20 years, they are guaranteed to double in value. That works out to a roughly 3.5% average annual yield, but you only get it if you have the discipline to hold those bonds for a full 20-year term.
You have better alternatives
The problem with EE bonds is that even that higher 2.1% rate pales in comparison to what you can get from other types of investments. If you're not looking to hold onto a savings bond for more than a few years, you can buy other Treasury bonds with yields between 4.25% and 4.75% -- more than double the augmented EE bond rate. Those who prefer investing for the long haul can get more than 4%, even on 10-year and 30-year Treasury bonds.
Moreover, even most high-yield savings accounts at online banks have seen their interest rates move above 2.1%. Series EE savings bonds aren't entirely liquid, with a requirement to hold them at least one year. And you have to pay a three-month interest penalty if you redeem them within five years of issue.
For most investors, EE bonds still don't make sense as investments. With better options to cover a wide range of potential needs, most investors are better served concentrating their savings-bond activity to I bonds for now.
