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Seeking Yield And Safety? The Best Choice Is U.S. Savings Bonds

Sep. 09, 2020 4:43 PM ET49 Comments
Tipswatch profile picture


  • EE Bonds will earn a remarkable 3.5% annually if held for 20 years, tax deferred and free of state income taxes.
  • I Bonds will match U.S. inflation with a flexible maturity date and solid protection against deflation.
  • Both of these savings bonds are likely to outperform other safe investments like U.S. Treasurys and bank CDs.

These are dire times for investors looking for both safety and a return that can surpass or at least approach U.S. inflation. If you are retired, it's a double whammy: You want to set aside cash for future needs, but you will earn only pennies on many thousands of dollars.

The Federal Reserve in March dropped its key short-term interest rate, the Federal Funds Rate, to a range of 0.0% to 0.25%, which translates to an effective rate of about 0.05% to 0.09%. And it is actively purchasing Treasurys -- and even corporate bonds -- to suppress longer-term interest rates. Most importantly, the Fed is signaling that these ultra-low rates will continue at least through 2021, and probably much longer, even if inflation perks up above 2%.

Here's the outlook from a Barron's report this week:

"We're going to be in a zero-rate policy interest-rate environment for three-to-five years, so investors' need of yield, which has been very strong, is only going to go up," says Ashok Bhatia, deputy chief investment officer for fixed income at Neuberger Berman in New York.

"in an environment where 5-year government bonds yield 0.25% and 10-years are at 0.67%, from an income standpoint or preservation of capital standpoint, it's hard to make an argument that government bonds serve much of a role for investors right now."

Obviously, some investors are going to give up "safety" to pursue yield. The other alternative is to try to live with below-inflation returns on cash and near-cash investments. But there is an alternative.

What is safe?

I've been writing about U.S. Series I Savings Bonds and Treasury Inflation-Protected Securities for nearly 10 years, with the idea that these investments can be purchased and -- in the case of TIPS -- be held to maturity with total safety and total expectation of a return

This article was written by

Tipswatch profile picture
I am no longer writing for this site. More details. I will continue to post updates at my site, TipsWatch.com.-----David Enna is a long-time journalist based in Charlotte, N.C. A past recipient of two Society of American Business Editors and Writers awards, he has written on real estate and home finance, and was a founding editor of The Charlotte Observer's website. The Tipswatch blog, which launched in April 2011, explores ideas, benefits and cautions about U.S. Series I Bonds and Treasury Inflation-Protected Securities, which David believes are an under-appreciated and under-used investments. David has been investing in TIPS and I Bonds since 1998.

Analyst’s Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

David Enna is a financial journalist, not a financial adviser. He is not selling or profiting from any investment discussed. The investments he recommends can purchased through the Treasury or other providers without fees, commissions or carrying charges. Please do your own research before investing.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (49)

devesh.shah profile picture
Thank you for this article. What will the tax treatment on the savings bonds at the 20yr mark when the treasury makes a bonus payment. is it interest or capital gains?
Tipswatch profile picture
It is interest, so half of the payout at 20 years will be taxable as income, under current tax law. (However, the proceeds can be used for educational expenses tax free, more here ... www.treasurydirect.gov/... )
Hi TIPWatch

Great article! New to US bonds and looking at 5 yr "I Bonds".

For interest rate, what is the best time to purchase "I Bonds", before Nov 1 reset or after Nov 1 2020?

Where can I find current interest rates and when are they credited?

Does the interest earn interest?
Tipswatch profile picture
@tajasbelle ... I think buying before or after November 1 would work, as long as you buy in 2020, and then you can buy again in 2021. The inflation-adjusted yield looks likely to rise on Nov. 1, but the fixed rate is highly likely to remain at 0.0%. If you buy in October, you'll get the current variable rate of 1.06% for six months, and then the new variable rate (probably around 1.5%) for six months. The new variable rate will be determined on Oct. 13, when the September inflation report is released. (I will be writing more about this decision in the days after Oct. 13.)

If you are buying as a long-term investment, timing doesn't matter much, but if you buy a savings bond near the end of the month, you are credited for the full month of interest. So a lot of people buy near the end of the month, but it's almost all symbolic, since your current cash is probably earning near zero anyway.

Yes, I Bonds earn compounded interest, which is applied to the principal balance twice a year. The date of interest payments depends on the month you buy the I Bonds. You can learn a lot more here: www.treasurydirect.gov/...

I'm planning for 5 yr I-Bond, but may let it run until . . ?

Any key treasury Direct important considerations - I will be reading?

Wish I had known about these bonds before since retired and being safe.
I got excited about this until I realized you can only invest $10K.

I wish I'd known 40 years ago that I'd could make more money in a 4.25% savings account at any bank prior to the election of Barack Obama, than I would make in the Wall Street Casino over a lifetime of "investing". Inflation-free savings bonds might have been of interest -- 40 years ago, when $10K was a lot of money.

I don't need more money. I just need to not lose lose my shirt to inflation, now that I'm not working. With the Gooberment 27 trillion in debt, you'd think they'd be willing take a zero interest loan on any amount I'll give them, on a promise not to inflate it into oblivion while they hold it. But no! "Rich" folks (who got that way by living within their means for 40 years to avoid eating dogfood in their old age) not allowed!

Sorry... just venting.

At this point, any tips on where to simply hang on to what I've got, in a world where TIP swings 16% in three years?
Tipswatch profile picture
Actually, TIP shot up 16% just since mid-March. I feel your pain. I'm not single minded, and I do invest with an asset allocation in stocks and bonds, all in low-cost, tax-efficient funds. But I write about ultra-safe investments, and now that is a grim space.

I Bonds work well if you can buy them year after year, and never redeem them until you truly need the money. It's possible to build a decent allocation that way, but in year one ... you get $10,000. It won't change your lifestyle!

I have some friends asking where to put some cash. One is older, a lot older. I say: "Well, a CD paying 0.75% probably isn't bad." As ridiculous as that sounds, it is true.
"TIP shot up 16% just since mid-March". True. And it LOST 6% over TWO YEARS prior to that. Imagine buying what you thought was a "safe" way to merely dodge inflation, only to watch a couple hundred thousand slowly drip out of your life savings over the next couple of years, while you wait for the next boom in your "safe" "investment" -- that you might not live to see.

"CD"? Sure, just tie up your money for three years, so you can guarantee 0.75% less of a loss.

The casino (much like the FED) ruins everything it touches.
puddnhead profile picture
@Tipswatch Tell your friends that (at least for the moment) Citi Savings is also worth looking at, it's paying 0.9% banking.citi.com/...

Just want to also let you know (if it hasn't been stated already) that I discovered your article from reading a very appreciative restatement of your ideas, at Bloomberg, focusing on the fact that EE bonds are guaranteed an automatic double at 20 years: www.bloomberg.com/...

Finally, since it's relevant to these general topics. *If* your friends or anyone else is eligible for a 403b or 457k plan (i.e. employed by non-profits and/or educational institutions; alternatives to 401k), and are willing to commit these funds to retirement, TIAA-CREF GRA annuities offer a risk-free >= 3%. GRA is the annuity version that you can elect to transfer out of at any time (they offer other versions that yield a bit better, but then your funds are locked into the annuity until retirement). The salary amount cap to defer into these vary by age and other circumstances, but I believe the range is 20-27k per year, for *each* plan (so if you are eligible for both, that is 40-54k max). My wife and I, for example, have funneled a combined ~80K into these accounts over the last year (spanning two calendar year contribution periods). The "cherry on top" to all this is that about a few years ago they added the ability to do these deferrals as Roth (!) in addition to the pre-tax option they always do. I didn't discover this immediately, but once I did I've been striving to max out my contributions, liquidating taxable investments when necessary after not getting paychecks for months at a time ;) So in summary: a liquid, 100% tax fee, minimum 3% return that you can invest $20-$27k per years, and move in and out of to invest in TIAA-CREF fund options at any time & without penalty. *If* you qualify by having an employer who offers them.
Jareth_King profile picture
What's your thoughts on the fixed rate reset on the I bonds this coming November?
Tipswatch profile picture
I would say with 99% certainty that the fixed rate will remain at 0.0%, and it will probably stay there until some time in 2022. If the Treasury raises that fixed rate, it would be a wonderful "gift" to safety-seeking small investors. But ... won't happen.
Tipswatch profile picture
Of course, the question: Would the Treasury set a negative fixed rate for an I Bond? I don't think it would ever do that. If it did, "I GIVE UP."
Two questions, one about the "worst-case" Series I bond case and one about another about SPIAs with a 2% COLA add-on: 1. I just don't understand the hypothetical -- What do you mean by showing inflation the higher rates in the chart like 1.5%, 2% etc if the actual inflation rate is also 0% during the March to September period and you already held the I bond for a year and then cash it in?

2. According to BlackRock's CoRI website, the median price of one dollar of guaranteed annual perpetual income of a COLA-adjusted SPIA at age 65 is currently $26.16. (at www.blackrock.com/... and FAQs) So how does that compare to the savings bonds?
Tipswatch profile picture
If you hold an I Bond for just one year, it essentially becomes a nominal investment and inflation is out of the equation. You get six months at one interest rate (currently 1.06%), and then six months at a second interest rate. In the hypothetical scenario, the second six months was set at 0.0% as a "worst case." As of the last inflation report, it was running a 0.70%, which translates to a variable rate of 1.4%, much better than 0.0%. The worst case isn't likely to happen.

I don't know enough about BlackRock's CoRI program to comment on that. I assume with a SPIA you are left with zero dollars after death?
My description oversimplified the CoRI indexes' construction somewhat but I think that they can roughly be described as tracking the median prices of SPIAs. If you buy a SPIA and then in the worst-case scenario die one second later, then the insurance company can keep all the money. Realistically though that is not likely to happen, particularly to your typical reader who will likely outlive the average lifespan because of their higher-than-average education, wealth, etc. So if the SPIA can reasonably be expected to pay out more per year than savings bonds would have, is roughly as secure under the applicable annuity guaranty program, and can reasonably be expected to outlive your expected lifespan, then would you have the same or more assets in the end?

I'm obviously mathematically challenged, unlike you. Look forward to hearing your thoughts.
In the second paragraph under Summary, shouldn't the effective fed funds rate be 0.05% to 0.09 percent?

My wife and I have been purchasing no-penalty and one year CDs from Marcus for the past few months after treasury and corporate bond yields collapsed. We've adequate quick-access funds now and will begin buying I-bonds bonds again shortly. A good and timely article. Thank you!
Tipswatch profile picture
@May River View ... thank you for spotting that! I have submitted a correction.
Worried about tying up funds for very long periods, as you should be?

If needed, your bank will loan you cash against CDs and T-Bonds very cheaply. Years ago I had a very desirable above-market rate CD. I needed cash for a short period but didn't want to turn in the CD and pay a penalty. My bank was happy to loan me 90% of the CD's value. The transaction was fast, cheap and simple. From the bank's standpoint the risk of loss was about zero!
Tnx for you earlier reply. Your post got me curious about EE bonds. TD says paper bonds were sold at half value, electronic bonds are being sold at face value with 0.1% interest. So, sounds like no more 3.5% available, unless one already has paper EE bonds.
The 3.5% applies "if held for 20 years" as stated in the article.
@shooligan tnx, - I went through three pages of td talking about EE bonds, still can't find where they guarantee the doubling at 20 yrs. I believe you, just puzzled why td does not explain this.
Tipswatch profile picture
The Treasury doesn't use the "half value" terminology for electronic EE Bonds anymore. Here is the exact wording:

"Electronic bonds are sold at face value (not half of face value). They start to earn interest right away on the full face value. Treasury guarantees that for an electronic EE Bond with a June 2003 or later issue date, after 20 years, the redemption (cash-in) value will be at least twice the purchase price of the bond. If the redemption (cash-in) value is not at least twice the purchase price of the electronic bond as a result of applying the fixed rate of interest for those 20 years, Treasury will make a one-time adjustment at the 20-year anniversary of the bond's issue date to make up the difference.

"EE Bonds continue to earn interest until they reach 30 years or you cash them, whichever comes first."


After 20 years, under current terms, the EE Bond doubles in value, and then continues to pay the 0.1% fixed rate (on the doubled value) until year 30.
jbwatcher profile picture
I bought $30K of iBonds in May & June 2000 with a fixed rate of 3.5%. The current yield is 4.68%. This was one of best fixed income investments I have made in my 40 years of investing. I will need to start redeeming these bonds later this decade. I can't bring myself to buy more iBonds now with a zero fixed rate. There are many other well managed fixed income investments out there (Closed end funds) to chose fund. JB
I've discovered that the Treasury online "Savings Bond Calculator" now calculates "Final Maturity" which is the date the bond stops earning any interest and should be cashed in. Did they add that useful feature recently?

As an example, my EE bonds issued in November 1992 and originally yielding 6.0% pay a current rate of 4.0% and and will reach their Final Maturity in November 2022. That 4.0% is remarkably high compared with current treasury notes of the same maturity, and several times what banks now pay on CDs. Plus 2-year bank CDs would have an early withdrawal penalty which the matured EE bonds don't carry.

Oddly, the "goodness" in those old EE bonds was not so much what they paid when new (6.0% in the case of my 1992 bonds), but in what they pay now (4.0%). Thus, you *DON'T* want to cash in old EE bonds without thoroughly researching them.

The Savings Bond Calculator can be found here:

Tipswatch profile picture
I think it has always been there, and was in the old Savings Bond Wizard, too. It is very helpful information. I wrote a guide to using the Savings Bond Calculator back in June 2018 and my screenshots show that column in there: seekingalpha.com/...
The after-Final-Maturity rate, 4.0%, has been in effect as long as I recall, going back to when prevailing rates were much higher. How is that rate established and what's to prevent it from being slashed?
I'd be happy to earn 3.5% a year for the rest of my life. However, I'm now 60 and haven't thought about savings bonds for decades until I read this article. Too bad you have to hold EE bonds for 20 years and can only buy $10000 worth a year. Otherwise, I'd do it. Oh well, it's why I keep reading and researching. I never know when I'll run across an investment idea that could benefit me. Thanks. Interesting article.
You could just use them as part of your estate. Than your children could just wait until the 20 years was up.
At 60 many people can expect to live long enough for the bond to mature. And at 80 many people are still active enough to enjoy the proceeds.
Johan2003 profile picture
Thank you Tipswatch, perfect timing for me. UsuallyI do CD's for 5 years but have cut back to 3 years and basically stopped. Have been putting my cash in no penalty CD's, but even that does not help much. My I-bonds are old from 2000/2003, we have been retired for 20 years so a difficult time to have cash. After reading your article I bought some I-bonds this morning and with a penalty I can always take it out after 1 year. For now planning on 5 years. Hanna
preserving profile picture
I wish the periodic inflation adjustments took currency devaluation into consideration
Tipswatch profile picture
In theory, at least, if the value of the dollar falls, inflation should rise. The value of the dollar has fallen about 6% since February, and inflation has inched up. For the last two decades, countries exporting to the U.S. are willing to take the hit, and inflation stays low. This time?
Jamjack profile picture
All my EE Bonds earn that minumum. I forget now 4% ? ?

I needed to dust them off the earliest will stop paying very soon i think.

Ridicule away equity investors if you want, the author is right. Besides who says you can't stash away some of these and do stocks too! I do and I'm doing just fine.
"Cash in These Savings Bonds That Have Stopped Earning Interest"

"Most savings bonds earn interest for 20 or 30 years. Here’s how to identify them so you can invest the money elsewhere."

From Kiplinger: www.kiplinger.com/...
Jamjack profile picture
Thanks for the link.

I may have over indulged in buy through paycheck reduction years ago before I stopped and when they came in by mail put them away and forget about them. They are doing fine focus efforts on stock research. Time flys and maturities are coming fast.
Ty, your posts are always thoughtful and useful. To clarify this point: ” In times of deflation, an I Bond never loses any value. This is not true for TIPS, which see principal balances fall after deflationary months." - I think you mean "if redeemed/sold early during such months." My understanding is that the original value of TIPS is honored if TIPS are held to maturity, even if there is an overall deflation.
Tipswatch profile picture
Technically, what you say is true: A TIPS is guaranteed to return its original par value, even after a long period of deflation. But there are a couple of issues to consider:

1) at a time of negative real yields (like now), you will have to pay a premium above par to buy a TIPS, and that premium these days could be 10% above par. The premium you pay is not guaranteed to be returned at maturity, only the par value.

2) During the course of your investment, you will have built up a higher principal balance, due to higher inflation. When deflation strikes, that balance will decline. You will need inflation in the future just to get to the point you were before deflation set in.

3) The principal accrued in I Bonds never goes down in value, so they never need to "make up" for lost principal due to deflation. So I Bonds actually out-perform TIPS during times of deflation.

But TIPS, realistically, are a very safe investment. I Bonds are just a little better during times of deflation.
Old matured EE bonds from the early 1990s can pay 4.0% even AFTER normal maturity. Mine paid 6.0% when new. A few years before that, they paid 7.5%. After maturity you can cash them in anytime. I think of mine as being like high yield government insured MM funds. Check before you cash them in.

There were periods years ago when they were about the best/safest fixed income investment. You are correct that no broker will ever recommend them.
Tipswatch profile picture
I'd be wary about assuming that an EE Bond issued in the early 1990s will pay 4% forever. I have some from August 1992 and yes, they are still paying 4% interest. These mature in August 2022 and will pay 4% interest until then. But the EE terms seem to indicate that after 30 years, interest payments stop. Treasury Direct says about EE Bonds issued from November 1982 to April 1995:

"Some bonds issued in this period have matured and stopped earning interest."

Some of my EE bonds were bought in November 1992 and some in February 1993. That period must have been a sweet-spot for EE bonds. Both series paid 6.0% when new. There was a limit on how much you could buy; I bought the maximum allowed. It should be noted that such Federal bonds are exempt from state taxes.

I checked on mine a few months ago by phoning the Treasury EE Office. They will pay 4.0% for about another year or two, as I recall. Then they will pay nothing and should be cashed in.

Nowadays you don't want to redeem anything government insured paying 4.0% a day sooner than you have to.
User 13175852 profile picture
Nice writeup on different I-bond strategies. Thank you. I agree with you on EE. I bought paper EEs throughout the 1970s to 1990s at $50 - $100 per week, average yield was 4.5%, converted all of the them to a treasurydirect account recently and now I have a steady stream of ~~$600 per coming in on the CoI account in treasurydirect. Will last ~~20yrs. That weekly contribution was small & in the background which allowed me to focus on other asset classes like MSFT, WMT, XOM, ect. I recently set my 23yr daughter up on treasurydirect and will methodically load that up with EEs for her for her fixed income allocation. I'll turn it over to her in ~~10yrs., she can choose to keep or toss. This way, she can now focus (and learn) about investing and the markets on things like acorns.com, robinhood.com and beanstox.com ... which is what she & her 20-someting friends do anyway.
nicholas davout profile picture
Savings Bonds, really? I cashed in mine on my 13th birthday and invested in stocks and retired

at age 48. Ony richer now 22 years later.
Tipswatch profile picture
Good work, Nicholas. Now protect that wealth.
Jareth_King profile picture
@nicholas davout

How fascinating
must have bought tesla 22 years ago....lol
smurf profile picture
Refreshingly different subject and very interesting. Never much thought about U.S. Savings Bonds, except found some in my mother's basement, after she passed, in an old fridge that was still working. Had a tiny freezer, and that's where those bonds sat. A couple of thousand $ as I recall. On ice, you might say. They had long ago matured, so I promptly cashed them when the estate was settled.

Jareth_King profile picture
That's an interesting tale. Were they from the war years?
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