Savings Bonds Keep Value but Can Cost You Money

Kimberly Watson, Editor in Chief
October 04, 2012 /

There are two factors related to the yield on series I savings bonds; the rate of inflation over a six month period and a fixed rate component. This creates the potential for the semi-annual inflation rate paid on a bond to become negative after a deflationary term.

Series I savings bonds will not lose their value on redemption, but the greatest risk attached to them is that they may stop earning interest during a deflationary period when the Consumer Price Index is in decline. Should the rate of the negative inflation be greater than the fixed rate component of the bond, interest would not be earned on Series I savings bonds for a six months period.

A primary factor is that there is no need for concern regarding the series I savings bonds losing value. The redemption value for any specific month has a guarantee from the Treasury Department that it will not be less than its value for the preceding month. Therefore, savings bonds would not lose value if cashed in before the maturity date.

This was a situation that occurred in May 2009 after the United States Department of Treasury gave notice of a negative rate of inflation. In these circumstances there is a zero rate of earnings on the savings bonds interest. However, it does not turn into a negative yield.

You are not permitted to cash in savings bonds during the first year of ownership, unless under certain specified conditions such as for disaster victims. Should bonds be cashed in during the first five years of ownership then the previous three months of interest earnings are forfeited. For owners of owning savings bonds for more than for over ten years these restraints are not applicable. Series I savings bonds have a final maturity term of thirty years and if held for thirty five years they no longer earn interest.

Since you’ve owned the bond for more than 10 years, these constraints aren’t relevant to you. Finally, Series I savings bonds have a final maturity of 30 years. Don’t hold on to yours for 35 years, because the bond stops earning interest.

 

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