What are Savings Bonds?

Savings bonds are one of the oldest investment vehicles in history. Before the mutual fund and before the creation of true stock markets, buying and selling government debt was always a possibility. Today, US savings bonds are still a very popular investments amongst older investors and as gifts, but their benefits certainly extend further than just another thoughtful gift.

What are These Bonds?

Savings bonds are essentially ownership of public debt. The US Treasury sells US savings bonds as a way to boost liquid cash in the public trust while garnering a return for investors who find the bonds a valuable investment. The bond is backed up by the taxing power of the federal government to repay debtors whenever necessary, although savings bonds can also be paid off by the power to print more money. US savings bonds are considered the safest investments because they are backed with the full trust of the US government. The chance of default on government bonds is tiny in comparison to corporate and municipal debt, though the possibility of default remains with any investment.

How to Purchase US Savings Bonds

US savings bonds can be purchased directly from the Treasury online or can be purchased at many US banks. Full service brokerage houses also cater to savings bond investors, but may charge a fee or limit access to purchasing bonds to only the wealthier investors. The best bet for individual investors is to buy US savings bonds directly from the source, cutting out the middleman and insuring a smooth transaction. Purchases of US savings bonds have soared since the Treasury began the online purchase program.

What are the Benefits to Savings Bonds?

Savings bonds make a great investment because they are extremely safe, although they pay a much lower rate of return than other investment choices. The biggest benefit is undeniably the taxing structure of the interest earned on US debt. The interest accrued on these bonds is entirely tax free on the state and local level, which makes the returns that much more generous when compared to both certificates of deposit and money market accounts. Certificates of deposit and money market accounts are both taxed at the state and local level and come with a federal guarantee from the FDIC for amounts under $100,000. Depending on tax brackets and the current interest rates of both US Savings bonds and other safe investments, you may get better returns by placing your cash in tax free US debt.

Savings Bonds Go Global

Treasuries around the world offer savings bonds to generate investment capital from citizens to cover deficit spending or other obligations. The rates of return vary greatly around the world as a result of different inflation figures and the possibility of default by nations. Developing countries often have the highest rate of return, but are more susceptible to failure due to bad foreign relations or a larger inflation statistic. Investing in overseas bonds carries even more additional risk in the changing exchange rates between the two countries.