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U.S. Treasury Offering One-Year Securities with 1.2% Yield (But You Just Can't Buy Too Many)

The good news is that U.S government really will sell you a one-year security with a 1.2% yield rather than the market's  0.3% yield, but the bad news is that it won't sell you too many of them. 

The Treasury is currently offering Series EE U.S. Savings Bonds with a yield of 1.40%, fixed for the 20-year original term of the bond. (Offered rates are subject to change in May and November.) The purchaser of savings bonds has the right to redeem the bonds at any time after they have been outstanding for at least one year, however, bonds redeemed before they have been outstanding for five years have the last three months of interest deducted from the redemption proceeds as a penalty.

Savings bond accounting and interest accrual is always as of the first day of the month. Therefore, savings bonds bear an issue date of the first of the month, regardless of when in the month they are purchased and are deemed to have earned the current month's interest as of the first day of the month regardless of when in the month they are redeemed.

Using this month as an example, you can buy a $1,000 cost Series EE savings bond on the last day of July and redeem it one year later on the first day of August 2011. (Please no comments about the extra day, or CMT, BEY, etc., as saving bond interest calculations are somewhat idiosyncratic anyway.  See 31 CFR §351.32 for details.)  You will receive ten months of interest (the thirteen months that the bond was outstanding less the three month penalty) with total proceeds of $1,012, equivalent to a T-bill yield of 1.2%.  Of course, depending on rates a year from now, it might make sense to hold on to the bond.  One of the attributes of these bonds is that you have the right to redeem it when you like.

As I mentioned at the outset, one problem with this trade is that the government limits annual investments in Series EE saving bonds to $10,000 per social security number ($5,000 in paper bonds and $5,000 in electronic form).  Up until two years ago the limit was $60,000.  Of course, with spouses, children, parents, etc. a higher amount may be able to be reached. (Registration regulations, including those concerning joint, beneficiary and trust registration, may be found at Among the benefits of savings bonds are that they are full faith and credit obligations of the government and are state and local income tax exempt, and recognition of taxable income may be postponed until the bonds are redeemed. 

One last relatively obscure feature of Series EE savings bonds:  As a vestige of earlier days of the savings bond program, the Treasury continues to guaranty that Series EE savings bonds will at least double in value by the time of their original 20-year maturity, regardless of their stated interest rate.  (When you buy a paper Series EE savings bond, the face amount is actually double the amount you pay for it.) Any shortfall between the accrued interest at the stated rate and twice the original investment is added to the value of the bond in last month of the original term.  (In the case of the above bond, a whopping $675 of interest would be added to the approximately $325 of accrued interest at 1.4%.) This means that if you decide to hold an EE bond through its 20-year original maturity your actual yield will be at least 3.5%.  

Disclosure: I hold some old savings bonds.