As I noted in my previous post, I’m going to be buying my 2015 allocation of I Bonds next week, even if the fixed rate rate remains at 0.0%. But if I were considering buying EE Bonds, I would do that this week, before any possible change in Treasury policy on Nov. 2.
EE Bonds are an overlooked but very interesting investment, but only if held for 20 years. They currently pay a fixed rate of 0.3%, and that won’t change for 20 years. And then at 20 years, the Treasury guarantees your principal balance will double:
EE Bonds issued on and after May 1, 2005, will reach original maturity at 20 years. These bonds also are guaranteed to double in value from their issue price no later than 20 years after their issue dates. This is the bonds’ original maturity. If a bond does not double in value as the result of applying the fixed rate for 20 years, the Treasury will make a one-time adjustment at original maturity to make up the difference.
Doubling after 20 years means that EE Bonds effectively pay 3.5% interest. That is very generous in today’s market, because a 20-year Treasury is currently paying 2.50%, 100 basis points lower. That is a huge margin on a 20-year investment. (In fact, even 30-year Treasurys are yielding only 2.87%, 63 basis points lower.)
I like the idea of using EE Bonds in combination with I Bonds. If you are in the 55 to 65 age range, earning 3.5% on a 20-year investment is very attractive. With EE Bonds, you get a guaranteed return. With I Bonds, you are protected against unexpected inflation. With both, income is tax deferred until the bond is sold.
So why buy RIGHT NOW?
I don’t think the Treasury will change its policy on EE Bonds doubling in value after 20 years, but the edge they have over 20-year and 30-year nominal Treasurys must be giving Treasury folks the fits. That is out of whack.
So there is at least a small chance the Treasury could change the terms on EE Bonds, possibly stretching out the doubling period to 25 years (resulting in a return of about 2.8%) or even 30 years (about 2.3%).
Will the Treasury do that? I don’t think so. But just to be safe, buy your EE Bonds this week and don’t let the Treasury mess up a nice thing.
Actually, I think these are rather a bad deal unless you are absolutely sure you can hold for 20 years. If rates go up at let’s say ten years and you want to switch to a higher coupon EE, you get no benefit from the promise to pay double. So, you are stuck with what has become a now low interest bond for another ten years. Maybe still better than if you had bought the 30 years bond, which is now worth less than par,, but that’s not so clear either — at least you’ve been reinvesting the coupon for 10 years, presumably at ever higher rates.
I understand what you’re saying, but I still think for some people this would be a good investment, if you have the disposable income to tie those monies up for that length of time. It would also be a good vehicle for grandparents to buy for young grandchildren, with the grandparents holding those bonds. The EE bonds are not a good fit for me right now, however. I’m watching the I Bonds. I do have a good number of EE bonds reaching their 30 year maturity next year, having earned 4% for the 30 year period, and I consider them to have been a good investment.
Thank you. I too see nothing wonderful here.
I. too, wondered why the EE bonds would be attractive to ages 55 to 65.
Again, good information that the average person wouldn’t know. And, explained in terms we can all understand.
What am I missing? Earning a “safe” 3.5% return is attractive. 20 years isn’t the best but ok. BUT why is this especially attractive to 55 to 65 year olds? There are no periodic interest payments, one must wait 20 years to get the 3.5% return and many of these people will be gone within 20 years from now. Please explain.
Here is my thinking: At age 55 (or even 40 or 45) buy EE bonds up to the limit each year ($10,000 per person; $20,000 for a couple). In 20 years, in retirement, you are assured of collecting $20,000 (or $40,000) each year. But you don’t have inflation protection. So I would combine that with investments in I Bonds. Both investments are tax deferred. I am figuring there is a high probability that my wife and I (or maybe just one of us) will live to 85.