Rates on U.S. Savings Bonds Set to Go Down

The Treasury Department is scheduled to reset rates on the Series EE Savings Bond and the Series I Inflation Bond on May 1. It is safe to say that the new rates are not likely to generate a lot of interest from rate-savvy investors. That’s because short-term interest rates and inflation are low right now, which effects both the rates on the Series EE Bonds and the Series I Bonds. The Series EE Bonds pay a fixed rate to holders with interest credited every month. Currently the rate is 1.30%, but the Federal Reserve has slashed interest rates to close to 0.00% since last November when the 1.30% rate was set. So how low will the Treasury Department go with the new rate on the Series EE Bond on May 1? That’s up for debate, but predictions as low as 0.25% have been offered up. The tough part about buying the Series EE Bonds when rates are so low is that when the economy does eventually recover and both inflation and interest rates go up again, holders of the Series EE Bonds will be locked in at a terrible rate.

The news for the Series I Bond is just as bad. We know that the inflation component of the bond will be negative because inflation (as recorded by CPI) was negative for the preceeding six month period. That leaves the fixed component to help contribute to the total return. Yet, there is almost zero chance the Treasury Department will set the fixed component high enough to compensate for the -5.6% CPI loss - so new purchasers of the Series I bonds will be effectively signing up for a 0% return. A note for concerned holders: The Treasury Department does guarantee that your composite return will never be negative no matter how low inflation goes.

The solution? Consider bank savings accounts as a better alternative to a U.S. Savings Bonds. They have the same federal backing, but pay higher rates and more liquidity. You can also place more than $5,000 in a bank savings account per taxpayer, unlike a U.S. Savings Bond which has a silly cap on accounts. Check the MoneyRates.com Savings page for a number of banks offering savings accounts with yields still over 3.00%.