(Update 11/1/22: Treasury Direct announced a new annual fixed rate of 2.10% for Series EE bonds, valid November 2022 through April 2023. Right now interest rates are high and you can buy a 20-year treasury note with an interest rate of 4.37% so Series EE Bonds are unattractive in this environment.)
After dipping my toes into US Treasury I Bonds, I began looking into US Treasury Series EE Bonds. These bonds offer a low rate of return, currently just .10%. The main attraction of the EE Bonds is that the treasury guarantees your money to double after 20 years; $100 bond will cash out at $200 after 20 years. If you hold the bond for 19 years, you may end up getting just a few percent return for the entire term. Yet leaving the funds for a full 20 years will yield a full 100% return, doubling your money.
I think of Series EE Bonds as roughly the equivalent of putting your money in 20-year CD which earns 3.5% APY; that’s about the rate which will compound to double your money after 20 years. If you pull out early from EE Bonds you’ll lose almost all of the expected returns.
A few other facts about EE Bonds:
- The rate on EE Bonds updates every 6 months (currently it’s .10%), but the doubling guarantee always remains the same.
- You can break the bond any time after one year, but you’ll lose the last 3 months interest. If you break it after 5 years you won’t lose any interest.
- You can hold the bonds up to 30 years. Some people opt to do so in order to avoid a taxable event after year 20, thus pushing off the taxable event to a more advantageous year.
- You only pay federal tax on the interest. There is no state or local taxes.
- You can buy up to $10,000 in Series EE Bonds per calendar year. This limit runs separate from the $10,000 limit on I Bonds – you can buy $10,000 of each type per calendar year.
Although 3.5% isn’t as good as average stock market returns, it is a nice rate of return for a federally-guaranteed investment. And a lot of people like keeping a certain percentage of their holdings in safer havens in case of market downturns.
Series EE Bonds can certainly make a good gift for a newborn or a teen. I was less sure about buying this myself: true, interest rates from high-yield savings accounts have been near zero for some time now, but there was a time in recent history when it was possible to earn 5%+ on a regular CD. Does it make sense to commit to a 20-year timeframe?
Without knowing what interest rates will be like down the line this may seem unwise. However, someone on the Bogleheads forum brings up a good point: as time from the initial bond purchase passes, so does your rate of return on the EE Bonds. For example, let’s suppose interest rates remain how they are (near zero) for the next 6 years, and then rates on high-yield savings accounts jump up to 4%. It may seem like your EE Bonds aren’t doing well. However, at that point you have just 14 years left on your bond, and the bond return is actually more than 5% since your money will double in just 14 years. Hopefully this makes sense.
Essentially, if we assume some number of years where interest rates remain roughly how they are now, it seems unlikely the EE Bonds won’t outperform what we’d get from a typical savings account. I’m thus considering adding EE Bonds as part of my cash/secure portfolio. (Update: I ultimately decided against it at this stage in my life.)
I’m a newcomer to bonds and decided to write some thoughts; hopefully some people will find this conversation useful. Feel free to add discussion or corrections in the comments below.
