QI have a daughter in college and another three years away. Given the U.S. government's recent downgrade from Standard & Poor's, how safe are savings bonds? What is the type of return one can expect and how is the interest accrued?

KATHY

AI remain a fan of U.S. savings bonds despite their near-nonexistent yield. The same holds for all safe securities. And I don't think there is any credit risk with U.S. savings bonds even after the S&P downgrade. It's striking that since the downgrade, money from around the world has been flowing into U.S. government securities, driving Treasury yields even lower. As I am writing this, the yield on a 3-month T-bill is 0.01 percent and the yield on a 10-year T-note 2.10 percent. Global investors are seeking a safe haven in U.S. Treasuries from Europe's sovereign debt and banking crisis.

I wish the U.S. government would promote savings bonds more. We all know that Americans saved too little over the past two decades. The average household has made remarkable progress in recent years, especially considering the weak economy and high unemployment rate. The personal savings rate is 5 percent, well above its recent low of 1 percent back in the summer of 2005.

Savings bonds let your money compound tax-deferred until they are cashed in. There are no commission costs to buy or sell. Savings bonds redeemed before the five-year mark forfeit the three most-recent months' interest (that's the only penalty). After five years there is no penalty at redemption. You don't pay state and local government taxes when you cash them in.

I-bonds are specifically designed to be a hedge against inflation. Every dollar you invest will be worth a dollar plus some interest in the future when the bonds are cashed in. The return on an I-bond is made up of two parts: a fixed-rate of interest and a rate that adjusts to changes in the consumer price index. Taken altogether I-bonds issued between May and October of 2011 will earn at an annual rate of 4.60 percent.

I wouldn't bother with I-bonds if you thought there was a good chance you would need the money in, say, three years. Then you would do better buying a different mix of safe securities, say, putting the money into an online savings account, short-term certificate of deposit. The big advantage of the I-bond for the long-term investor is that inflation won't erode the value of your dollars if inflation takes off sometime over the next several years.

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.