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.