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Are government savings bonds risk free?

Government savings bonds are generally deemed risk free because they are backed by the full faith and credit of the federal government. Most investors feel confident that the U.S. government will not default on its obligations to bond holders. However, there are other types of risk to consider.

Perhaps the biggest risk you face when buying government savings bonds is inflation risk. Most savings bonds have interest rates that are pegged to other government securities and are not adjusted for inflation (the exception is Series I bonds that are adjusted semiannually for inflation). As inflation goes up, the spending power of your dollars goes down. With government securities, there is always the risk that inflation will outpace your rate of return, effectively diminishing the spending power of your savings.

Interest rate risk is also a factor for EE bonds purchased through April of 2005. For these bonds, the interest rate is pegged to an average yield of other government securities. Their return, and the risk, is directly tied to how those government securities perform. If interest rates go down, returns will be affected.

For purchases on or after May 1, 2005, however, EE bonds earn fixed rates of interest.