Friday, September 16, 2016

How to get a 3.5% riskfree interest rate for the next 20 years

If someone offered you a guaranteed 3.5% return for 20 years, you’d probably be tempted either to sign up right away or call the cops to arrest the guy for securities fraud.

But the guy offering this deal is Uncle Sam, and you should neither barge in nor run away screaming. You should look closer, because this offer from the U.S. Treasury is legitimate and highly attractive, although it isn’t right for everyone.

The government guarantees that if you hold Series EE savings bonds for 20 years, you will get back twice the amount of money you put in. That translates to a return averaging a whisker more than 3.5% annually. A 20-year U.S. Treasury bond, meanwhile, yields about 2.1%.

In today’s yield-starved world, a 3.5% return sounds almost like manna from heaven. Is there a catch? Of course there is — several, in fact.

First, and worst, that 3.5% return isn’t protected against inflation. And you will earn that rate only if you hold on for the full 20 years; until then, interest accrues only at the current rate of 0.1% annually. ...

You generally can’t redeem savings bonds the first year you own them and, if you cash out within the first five years, you will forfeit the last three months of interest. (That’s not much of a penalty at this point, though, at 0.025%.)

Finally, interest rates could take off between now and 2036, making that 3.5% look a lot less appealing. ...

And you can invest only $10,000 in EE savings bonds per Social Security number each year; if you’re married, you and your spouse together can buy $20,000.
--Jason Zweig, WSJ, on an easy 1.4% alpha per year. Buy at