Why The Smart Money Is Buying I Series Savings Bonds

by: Learn Bonds

During the last 11 months, there have been $1.51 Billion of I bonds purchased, versus $356 million dollars of EE bonds. This represents a major change over the previous year, when $990 million of I bonds and $702 million of EE bonds were sold.

Why Have Investors Switched To I Bonds?

EE bonds pay a fixed rate of return. The current rate of return for newly purchased EE Bonds is 0.60%, which is fixed for the life of the bond. Newly purchased I Bonds pay a floating rate which is currently 2.2%, however that rate changes every six months. Which would you prefer earning 0.60% or 2.20%?

It gets even better for I Bonds: They Provide Inflation Protection!

The yield on I bonds is adjusted every six months in direct proportion to the CPI - U. If you think inflation is around the corner (like bond guru Bill Gross), I bonds provide you with an opportunity to earn more interest when it happens. However, it should be noted that the yield of an I bond can go all the way down to zero should there be no or negative inflation.

I Savings Bonds Are Interesting Because CD Rates Are Low

What makes now different than a few years ago? The main alternative to I savings bonds, a certificate of deposit, is paying a very low rate of interest. If the inflation rat averages just two percent over the next five years (which is a low estimate), the I Bond would be a better investment than a top yielding five year CD. Shorter length CDs make the comparison even more attractive for I Bonds. As John at My Family Finances says:

Boilerplate explanation aside, interest rates are currently more than double most of the best savings/CD interest rates. Until October 2012, bonds are earning at a rate of 2.2 percent. This is an astronomical return for a safe investment.

Savings Bonds Are Safe

I want to dwell on the word "safe". Savings bonds are backed by the government of the United States. There are lots of investments that pay higher yields, however most of them don't come backed by the federal government. For most investors, if you want government protection, you need to put your money in an FDIC / NCUA insured bank account, buy saving bonds, or treasuries. The IRS even encourages taxpayers to get I Saving Bonds with their tax refunds.

I would also like to add a note of caution. I saving bonds are a great place to safely store cash and have your returns keep up with inflation. However, most of us (except the extremely rich) need our money to grow at pace greater than inflation. I think I saving bonds are a great short-term investment decision but, not a long term retirement strategy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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