This week, the Bureau of the Public Debt announced a set of new rates for savings bonds. The Series I Savings Bonds to be issued in the next six months will earn a fixed 1.2% above prevailing inflation levels, making the effective rate for the next six months to be 4.80%. For Series EE Savings Bonds, a fixed rate of 3.50% will apply for the 30-year interest-bearing lifetime for any new purchases until November.
The rate for Series I is undoubtedly great! The fixed rate portion is dialed up from last six-month period's 1.00% to 1.20%, and 4.80% makes it a compelling product for now.
Let's discuss more about Series EE:
First, this is the first announced rate since Treasury's latest overhaul of the Series EE Savings Bonds program; different interest rates apply for Series EE bonds purchases in the past. (Series EE bonds issued between May 1997 and April 2005 will earn a 3.42% rate for the next six months.)
How should we think about the 3.50% fixed rate? In my mind, it is LOW, LOW, LOW. When Treasury first announced its plan to reengineer the program, it mentioned that Series EE rate will be somehow based on 10-year Treasury note yields. Apparently, Treasury is valuing the "put" feature and the potential tax-free status for interests (with eligible redemptions) very high -- the current rate is only about 80% of the 10-year Treasury yield at the start of May.
Also, if you recall, Series EE is guaranteed to double value in 20 years. At 3.5%, your every $100 new Series EE purchase will turn to $200.16 on the 20-year anniversary after semi-annual compounding. In other words, 3.50% is the minimal for the guarantee. Nice calculation!
As indicated by Savings Bonds Alert, after factoring in the three-month interest penalty for the first five years, the effective yield if you redeem prematurely will be:
1 year yield: 2.64%
2 year yield: 3.09%
3 year yield: 3.23%
5+ year yield: 3.53%
So, if you cannot promise yourself to hold on to your new EE purchase for five year, don't even both. The highest-yielding money market accounts in the market can give you 3.25%-3.30% APY with absolute liquidity and no penalty. (The market leader is now UFB Direct, whose account bears 3.30% APY, marginally higher than 3.25% from EmigrantDirect.) If you have more than 5 years' horizon, you don't want to consider Series EE either -- stock market might be a better place to go.
All in all, I believe it is fair to say the United States Department of the Treasury effectively killed the Series EE program. Anyone see how 3.50% can make Series EE a good purchase for somebody?