More Reasons to Skip Savings Bonds

The U.S. Treasury is wielding both a carrot and a stick to persuade savers to switch from U.S. savings bonds to T-bills, notes and bonds. The Treasury lowered the minimum purchase for T-bills to $100 while capping the amount of savings bonds you can buy in a single year at $5,000.

Savings bonds have faded in popularity. In the government's 1999 fiscal year, savers purchased more than 49 million bonds for $4.7 billion. They bought 17.6 million bonds for $2 billion in fiscal 2010. As of January 1, you won't be able to buy paper savings bonds through payroll deduction; the option ended for federal workers and military personnel in September. You can still have money deducted from your paycheck for savings bonds, but only by signing up for a free online account at www.treasurydirect.gov and arranging an automatic debit.

Paper bonds are still available to give as gifts. Go to your local bank, where you'll pay half the face value -- say, $25 for a bond that will be worth $50 when it matures. Or buy gifts online once you have a TreasuryDirect account. When you buy online you pay the face value, and the bonds earn interest until maturity. The recipient must also have a TreasuryDirect account.

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The decline in popularity of savings bonds isn't surprising, given their low rates. The Treasury announces rates on series EE bonds and I bonds for the following six months on November 1. Dan Pederson, author of Savings Bonds: When to Hold, When to Fold and Everything In-Between, predicts the EE bond's rate will be similar to its current 1.4%. I bonds have a six-month rate composed of the inflation rate for the previous six months and a fixed rate that lasts for the life of the bond. At 1.74%, the most recent rate included a fixed component of 0.2% and an inflation adjustment of 1.54%. If inflation stays at its current low level, the combined I-bond rate will drop a full percentage point -- unless the Treasury hikes the fixed portion to boost the bonds' attractiveness.