Fixed-rate EE Savings Bond features

Do you see any value to the new fixed-rate EE bonds? It seems to me that I bonds are the only real choice now.

Tom’s response

I expected Series I bonds to be the better investment before the fixed-rate EE bonds were announced and I certainly expect them to be the better investment now.

That said, one of the interesting things that the new EEs have is a fixed yield curve. That means you’ll know in advance exactly what you’d earn at the 1, 2, 3, 4, and 5 year points. (You have to adjust the rate for the 3-month early withdrawal penalty.)

For example, if they set the new EE rate at 3.5%, the yield curve would be:

• 1 yr - 2.63%
• 2 yr - 3.06%
• 3 yr - 3.21%
• 4 yr - 3.28%
• 5 yr - 3.50%

During the six-month period when these rates are available, they will sometimes become higher than equivalent short term T-Bill or CD rates, which would create an interesting situation.

Another interesting feature is that with interest-rate-based investments like corporate and government bonds and bond mutual funds, the value of your investment goes down as interest rates go up. That’s not going to happen with EE bonds, which gives them an unusual feature.

If interest rates rise over a period of years, there’s also nothing to keep you from redeeming any EE that’s older than one year and buying a new one with a higher rate. Whether this will make sense will depend on how long you intend to keep the higher rate bond and whether you expect your tax rate to decrease during that period.

So while I don’t think fixed-rate EEs are interesting now, I do think they would become interesting in a future with higher interest rates.