More Reasons to Skip Savings Bonds

Uncle Sam wants you to buy Treasury bills instead.

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 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.

Senior Reporter, Kiplinger's Personal Finance