When it comes to daring investments, just about the last thing anyone would think of is a savings bond. After all, if grandparents around the world dole something out to their grandkids for birthdays and holidays, how exciting could it be?
After a brief revival years ago, savings bonds nearly disappeared from the investing scene. But now that inflation has started rearing its ugly head, savings bond rates suddenly look somewhat attractive again. Was Grandma right? Should you start squirreling money away with savings bonds?
The good ol' days
It wasn't that long ago that savings bonds were actually a great deal. A little over a decade ago, savings bonds paid very attractive rates, with regular bonds paying well over 5% and inflation-adjusted Series I savings bonds paying 3% more than the rate of inflation.
But then the Treasury started clamping down, and suddenly those rates were lousy. Traditional savings bonds paid less than 1% for a while, and I-bonds settled in to pay only the rate of inflation. Suddenly, savings bonds went from being a smart investment for everyone back to being only good as a gift from Grampa.
Now, though, rates on some bonds have come back. As the government website for savings bonds notes, I-bonds will earn 4.6% for the next six months. Considering that most short-term rates are around 1% or less and even Treasury investors willing to lock up their money for 30 years can't match that 4.6% rate, people are starting to take notice of I-bonds again.
A one-time thing
It's true that earning 4.6% interest is better than you can expect just about anywhere else. Investors are actually accepting negative real rates on Treasury inflation-protected securities, which are similar to I-bonds. Investors in the iShares Barclays TIPS Bond ETF
But the problem with I-bonds is that you won't earn 4.6% forever. The current rate is based on the change in the Consumer Price Index over the past six months. Because prices have risen substantially during that period, the matching rate that I-bonds earn looks attractive. But if inflation drops back over the next six months, then your rate in November will be a lot lower.
So if you have your heart set on earning 4.6% for the foreseeable future, you may wonder if you have any better options. Longer-term corporate bonds from Gap
An alternative is to look to the stock market. Even with rates at low levels, many well-known blue-chip stocks pay 4.6% or more in annual dividends. Pharma giant Eli Lilly
When savings bonds are smart
The advantage that savings bonds do have is their ability to let people who aren't comfortable with investing set aside small amounts of money on a regular basis and put the magic of compound interest to work. During rare occasions like this when earnings rates on savings bonds are high, taking advantage of them can get you on the right road toward fiscal responsibility and a better future.
In the long run, though, you shouldn't expect to rely on savings bonds as a real part of your growing investment portfolio. As a convenient way to give a gift, they certainly play a useful role in helping children learn about money and investing. But unless their permanent rates return to more reasonable levels, most investors should leave savings bonds to the birthday-gift crowd.
Fool contributor Dan Caplinger owns some savings bonds from the good ol' days, but he suspects he may never buy another one again. He doesn't own shares of the companies mentioned in this article. AT&T and Wal-Mart are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Wal-Mart, which is also a Motley Fool Global Gains and Motley Fool Income Investor pick. The Fool owns shares of Altria and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy frees you from the bonds of bad investments.