savings

Can you ever lose money on savings bonds?

Don TaylorDear Dr. Don,
If you own a 35-year Series I savings bond and have held it for 10 years, is it possible for it to lose value if you need to cash it in before it matures? Can the price actually go down at times?

Thanks,
-- William Worries

Dear William,
Series I savings bonds never lose redemption value. The biggest risk is that they can stop earning interest amid deflation, when the consumer price index, or CPI, is falling.

The yield on a Series I savings bond is comprised of both a fixed-rate component and the inflation rate over six months, and it's possible that that semiannual inflation rate paid on the bond becomes negative following a period of deflation.

If this negative inflation rate is greater than the bond's fixed-rate component, then you wouldn't earn any interest on the Series I savings bond for six months. This actually happened following the U.S. Department of Treasury's announcement of a negative inflation rate in May 2009. In these situations, the savings bond's interest earnings rate goes to zero -- it doesn't become a negative yield.

And again, there's no need to worry about the savings bonds losing value. The Treasury Department guarantees that the redemption value of a Series I bond for any particular month will not be less than its value for the preceding month. So the bond can't lose value if you need to cash it in before it matures.

With a few exceptions, such as for disaster victims, you can't cash in a bond during the first year you own it. If you cash it in during the first five years of ownership, you lose the last three months of interest earnings. 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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