50 Million Investors Sent Savings Bonds Sales Skyward : Investment: Although a bit of a hassle compared to alternatives, Series EE can still be a better deal.
Cash is trash and CDs are yesterday’s news, so U.S. Savings Bonds must be history, right?
Wrong. Sales of Series EE bonds set a record for the fiscal year ended Sept. 30, with more than 50 million Americans investing $17.3 billion in them. That’s a 28% increase over 1992, when $13.5 billion worth were sold.
However, the sales rate dropped dramatically in the second half of the fiscal year, after the guaranteed yield dropped from 6% to 4%.
While personal finance experts say the bonds have their place, they worry that the bonds are being used as a substitute for long-term investments.
“I’m in favor of anything that will make people save. It’s better than going out and buying a fancy lunch, but if you want to do something for your kids, you’d probably be better off to open up a growth and income mutual fund,” said Paul Brown, a financial planner and co-author of the book “Grow Rich Slowly.”
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Some of the bonds’ advantages include:
* Safety. The bonds guarantee the principal and a 4% return.
* Flexibility. They can be cashed in anytime after six months, so, unlike a CD, investors are not locked in for another six months. If you cash the bond after nine months and six days, for example, you get nine months’ worth of interest.
* Small face value. Bonds come in denominations as small as $50 (issue price $25), so they are easier to give as gifts or for beginning investors to buy.
* Forced savings. The bonds can be deducted automatically from many companies’ payrolls, so they may force some people to sock away money they might otherwise spend.
* Tax exemption. The interest on bonds is free of state and local taxes and, if the money is spent on education, federal taxes. This can make them look more attractive than their 4% interest rate might indicate.
The bonds are also a good place to park cash for six or 12 months. With a guaranteed 4% minimum, they compare favorably to the average 2.8% rate for six-month certificates of deposit.
But as New York-based financial planner Rob Harrigan points out, that works out to only a $60 return on $10,000 in bonds. Add to this the hassle of not being able to purchase the bonds through brokers and the difficulty in replacing lost coupons, and many investors may not feel the difference is worthwhile, Harrigan said.
“For 4%, I would go out and buy a Treasury, which yields 3.2%. There the difference over six months is only $40 and you have more flexibility,” he said.
Until March 1, the guaranteed interest rate on bonds held for at least five years was 6%. Now the minimum is 4%.
There is a difference between an EE bond’s guaranteed rate and its current market rate.
The market rate is adjusted every six months, to 85% of the rate on five-year Treasuries. It is currently 4.25%.
Before the rate was cut, sales of the bonds averaged $2 billion a month. That slid to $800 million a month, however, as investors turned to higher-yielding investments.
