U.S. savings bonds can provide a higher return than money market accounts or bank CDs. Although they’re promoted as long-term holdings, savings bonds also can deliver excellent results for people with short-term needs. In addition, they’re backed by the federal government and they offer tax advantages.
Rather than traditional EE savings bonds, you might favor the newer I-Bonds, whose yields are adjusted for inflation. The current rate, through October 2003, is a combined 4.66 percent. Even if the variable portion of the I-Bond yield falls to 0 percent in the future, a highly unlikely and worst-case scenario, investors can earn a guaranteed total return of 2.61 percent, after an early withdrawal penalty, much higher than CD or money market rates.
There is some lack of liquidity with savings bonds because investors must hold EE and I-Bonds for at least 12 months. After this minimum holding period, there is a penalty for redeeming bonds within five years of their purchase. However, that penalty is slight–the loss of three months’ interest-so you probably would wind up with an attractive yield.
