Dear 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?
— William Worries
First, thank you for your question. Savings bonds have been popular over many decades, and they do seem to mystify people to some degree. It is good to have an opportunity to address your question.
You should know that 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 is falling.
Computing the rate of return
The yield on a Series I savings bond is comprised of both a fixed-rate component and the inflation rate over 6 months, and it’s possible that the 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 6 months. This actually happened following the Treasury Department’s announcement of a negative inflation rate in May 2009. In these situations, the savings bond’s interest earnings rate goes to 0 — it doesn’t become a negative yield.
So, don’t worry
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.
Beware of diminishing returns
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 5 years of ownership, you lose the past 3 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. Just don’t hold on to yours for 35 years, because the bond stops earning interest.
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