Government's Strategy to Sell EE Savings Bonds Amid Low Yields
Introduction
The U.S. government's strategy for selling EE savings bonds has been a subject of debate, especially given the current Savings Bonds yield of merely 0.1%. EE Series savings bonds, a popular financial instrument for savings and investment, traditionally offer a unique mix of features including a low coupon rate of return and a guaranteed doubling of value after 20 years. Let's explore how the government manages to sell these bonds despite the low yield and the benefits they offer.
Understanding EE Series Savings Bonds
EE Series savings bonds are a type of U.S. government-issued savings bond. They come with two primary features that make them attractive: the fixed coupon rate of return and the guarantee to double in value if held for 20 years. Currently, the coupon rate is at a historically low 0.1%, which is compounded semi-annually. Despite this, the bond offers a way to hedge against the uncertainty of future financial markets.
Coupon Rate and Compounding
The coupon rate is the interest rate that the bond pays semi-annually. With a rate of 0.1%, the investor receives a small but consistent return on their investment. This is particularly attractive for those looking for a low-risk, stable investment.
Value Doubling Mechanism
If the investor holds the bond for 20 years, the bond is guaranteed to double in value. This mechanism operates in two ways: historically, EE bonds were sold at half value and redeemable at face value after 20 years. However, the newer Electronic EE Bonds are issued at face value and double in value automatically due to the adjustment of the value over the 20-year period. The implicit compound interest rate, which is less than 3.5% when compounded semi-annually, allows the bond to reach its doubled value by the 20-year mark.
Adjustments in Interest Rate
In the event that the interest rate is too low (which can happen under market conditions or due to government policy), the government makes adjustments to the bond's value to ensure that the guarantee of a doubled value is met. After the 20-year period, the bond continues to accrue interest based on the coupon rate, making it a long-term investment vehicle.
Benefits of EE Series Bonds
Despite the low current yield, EE Series bonds remain a valuable tool for investors. They offer a guaranteed return on investment, a stable income stream, and the protection of a U.S. government-backed bond. These bonds are particularly appealing to individuals looking for a low-risk investment option that guarantees a return, even during periods of low returns in the broader financial market.
Conclusion
While the current yield of 0.1% is historically low, EE Series savings bonds continue to hold appeal due to their long-term value guarantee. The government's strategy in selling these bonds is to leverage the unique combination of a low-risk investment and a guaranteed return, making them an attractive option for cautious investors. Understanding the nuances of these bonds can help investors make informed decisions and benefit from the long-term value of the EE Series bonds.