Gift Bond Earning High Rate after 25 years
Not much could be more of a let down than getting a savings bond as a kid. Birthdays, graduations, etc. were a source of US Savings Bonds from relatives that I never was happy to see. $100 but it's only $50 now? I have to wait how many years before it's worth the number on it? It seemed like a scam.
Who paid $50 for a paper that said $100 on it, but was really worth only $50? Why not just give me the $50 and let me go buy some LEGOs today? Who has 15 years to wait for the other $50?
Fast forward a couple decades and we found an envelope stuffed with savings bond gifts, mostly from 1993, one from 1988. A few others were from 1997 and 1998 and 2005. They don't say on their face what interest rate they earn, but you can look each individual bond up on-line to find out what it's worth today, and what rate of interest it is paying.
The bonds from 1997-2005 are garbage, not surprisingly. They have been yielding an average of about 1% since issuance, considering that they are presently earning probably one tenth of one percent. On the other hand the bonds from 1988 and 1993 are still earning interest at 4%. They will continue to do so until 2018 and 2023 respectively. They have already surpassed their face value.
Four percent is not a big deal, but in the interest rate environment of today, it kind of is. These are U.S. Bonds, as safe as an FDIC insured bank account or certificate of deposit. But those kinds of investments are not earning anything close to 4% presently, and they haven't been for more than five years.
Lots of people think the dollar is going down the drain, and that US Bonds are in a bubble. Maybe they are right. But it seems not to make sense to cash these bonds in when there is no comparable investment we can make that is guaranteed by the US Government and also yielding 4%. These bonds are very liquid too. They can be converted to cash with no transaction fee at the teller window of almost any bank branch. You will need photo ID, and may have to be a customer.
The long term treasury bond ETF "TLT" yields under 3%. Your CD for a few years yields less than a percent. The DOW JONES yields under 3% in dividends and is not FDIC insured. Philip Morris yields 4% in dividends but is not FDIC insured (some may argue it is substantially more secure than FDIC insured).
Precious metals or oil could preserve the value of the bonds if we convert them into cash now, and buy those, but only if the dollar deteriorates in buying power at a rate of more than 4% per year.
In the end we cashed out the bonds that were not yielding 4%, from 1998 and more recently. That money was turned into silver bullion. The bonds yielding 4% will be preserved however, until maturity in 2023 or until interest rates rise past 4%.