Fixed income instruments, such as U.S. Savings bonds, are frequently recommended by mainstream investment advisers as part of a ‘balanced portfolio.’
As with all investments, you must research this area carefully, as all bonds are not the same — although it is true that all U.S. bonds are tarred with the same brush.
U.S. Savings Bonds are stable insofar as they pay a predictable rate of interest and (unlike marketable Treasury securities) aren’t subject to market fluctuations. They are risky insofar as the issuer (the U.S. Government) is going broke and will likely resort to depreciating the currency in order to pay its bills, meaning the real value of the interest paid by Savings Bonds may fall precipitously.
So if you were thinking of purchasing Series EE Savings Bonds – don’t. Today (that’s through April 30, 2015) they carry an absurd 0.10% fixed yield.
The 1.38% yield currently (through April 30, 2015) offered by “inflation”-adjusted I-Bonds is a little more plausible for investment. Savings I Bonds are convertible to cash any time after 1 year and they pay the coupon (now low, it’s true) PLUS inflation. They do not go backwards in value when market interest rates increase. When interest rates go up, you can sell the I Bonds, get both your principal and interest accumulated to date, and buy new ones with a higher coupon. A problem is the bond is still likely to lag behind actual rates of inflation, regardless of how the Treasury Department markets them.
Savings Bonds (unlike marketable Treasury securities) legally cannot be redeemed until at least one year after the issue date, providing an effective one-year “padlock” on the money. EE Bonds have a peculiar feature wherein they are guaranteed to double in value after 20 years via a one-time interest credit. So the effective yield over 20 years is approximately 3.5% — if you have 20 years to wait. That’s still woefully inadequate compensation for the risk you are taking by tying up your capital for two decades with an institution whose creditworthiness is deteriorating by the day and in a currency that is depreciating by the day.
While Savings Bonds exhibit more stability than stocks or precious metals over any given week or month, a low-yielding fixed-income investment can be among the riskiest assets to hold over a 20-year period. Within the next two decades we’re looking at the likelihood of a government default or a currency collapse. Even if the worst the government’s debt crisis produces is inflation rates of about 7% annually (it’s already that high according to alternative, unofficial measures), a Savings Bond holder could lose 3.5% a year in real terms. After 20 years of suffering 3.5% real annual losses, a $1,000 bond would be worth $490.40 in constant-dollar terms.
Bottom line: The math on Savings Bonds doesn’t make sense – unless you’re the one issuing them.
LIFE HACK: Check out www.treasurydirect.gov for rates and conditions.
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