To Your Wealth: Savings bonds revisited
The last time we wrote an article on savings bonds in 2022 their interest rate was close to ten percent. A lot has changed since then. Are savings bonds still worthwhile to own?
Before answering the question, a quick refresher about some of the unique properties of savings bonds. First, there are two types of bonds you can currently buy, the Series EE and the Series I. The Series EE typically has a lower interest rate and is not directly tied to inflation. On the other hand, Series I Savings Bonds’ interest rate is correlated to inflation (hence the high rate two years ago). Both types defer taxes on the interest income until you cash them in and are state income tax-free. The minimum holding period is 12 months with a final maturity after thirty years. If the bonds are redeemed within five years, you lose the last three months of interest. For the most part, you can only buy them online through TreasuryDirect (www.treasurydirect.gov) with an annual limit of $10,000 per person. 
One component of the Series I Savings Bond attracting more attention lately is the fixed portion of the interest rate (versus the variable portion that fluctuates based on inflation and changes every six months). As the name implies, the fixed portion stays the same as long as you own the bond. The current fixed rate (through April 30th) is 1.30 percent, which hasn’t been this high since May 2007. Your earnings are the combined total of the fixed plus variable rates which is currently 5.27 percent for purchases made by the end of April and will earn that rate for a minimum of six months.
Compared to money market funds or CDs (which are similar low-risk options), savings bonds continue to be an attractive option. If inflation continues to decline, the rate on Series I bonds will most likely decline too. However, if you’re concerned about the potential for higher inflation in the future, savings bonds provide protection. If we experience deflation (which happened in 2009 and 2015 based on how the variable rate is calculated), the prices won’t decline which is helpful too.
You could also redeem some of your old bonds (essentially anything purchased since November 2007) to replace the lower fixed rate with a higher rate now. A couple of caveats to consider is the $10,000 limit on new purchases (so don’t cash in more than this amount), paying income taxes on the accrued interest, and the timing when to cash in the old bond to minimize the impact of lost interest (if purchased in the last five years).
As an option for part of your “rainy day” fund (once you’re past the initial 12 month holding period), I think savings bonds are worthwhile to consider. The higher fixed rate makes holding the bond even longer attractive from a low-risk perspective. You won’t create significant wealth buying savings bonds but it’s a useful tool for preserving it.
Previous article on Series I Savings Bonds
