Everything to Know About Savings Bonds in 2023

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Savings bonds are getting enticing again.

While bonds were long a favorite gift of grandparents and other extended family members, the days when people directly buy and sell them had been dwindling until recently. A 2017 study by the St. Louis Federal Reserve found direct household participation in the bond market fell to 1.3% in 2016, compared to 5% in 1989. But with a new 7.12% annual rate for Series I bonds through April, the trusted classic is garnering attention as a way to combat inflation’s 7.9% year-over-year rise.

Savings bonds certainly aren’t as flashy or exciting as stocks. Many of them are guaranteed to double in value upon maturity—but only after 20 years, meaning the return is low compared to the potential upside of riskier investments. 

In exchange for that low return rate, however, savers get a secure investment they can count on. That’s why U.S. savings bonds have long been a teaching tool for young investors and a haven for families looking to set aside money for the long term. Here are a few basic pointers on savings bonds and why they matter in today’s world. 

What Is a Savings Bond?

Since their inception in 1935 by Henry Morgenthau, Jr., the then-secretary of the Treasury, bonds have stood out in the financial world. At their core, bonds are investments that are paid back over time based on agreed-upon terms with interest. 

The Treasury first introduced bonds to Americans to encourage saving and participation in government spending. One of the first types of bonds, initially called “Liberty Bonds,” was issued to fund World War I. And recently, the Treasury announced a relaunch of the 20-year bond to help fund growing budget deficits caused by the pandemic.

Those U.S. Treasury bonds are exactly what the term “savings bond” refers to. The United States government issues savings bonds to help finance its operations. By purchasing a bond, you’re essentially loaning the government money, and it promises to pay back with interest when you cash out, or the bond matures.

Nowadays, there are many different types of bonds available; at $10 trillion, the global bond market is so large it dwarfs the stock market

Bonds come in all different shapes, sizes, and types: there are savings bonds, corporate bonds, and municipal bonds. There are the bonds your 401(k) or investment portfolio includes in its mix. For this guide, we’ll focus on savings bonds between $25 and $10,000, which are what most people think of when considering buying a bond.  

U.S. Treasury saving bonds cannot be sold or transferred. They are agreements between you (the investor) and the U.S. government. This contract guarantees the U.S. savings bond does not lose its value. Regardless of interest rates rising or falling, you are guaranteed to earn at least double your investment plus interest—albeit slowly. That is why U.S. Savings bonds are regarded as a safe investment. 

Paper Bonds vs. Electronic Bonds

The days of going to the bank to buy a paper savings bond are over. 

In 2011, the U.S. Treasury stopped the paper savings bond program and switched to a digital model. Savings bonds were formerly available over-the-counter at banks and other financial institutions, but now can only be purchased online at TreasuryDirect.gov — the government’s website for buying and redeeming bonds. 

The move to digitize savings bonds came as more people and businesses abandoned paper for online channels. The initial thought behind the initiative was to eliminate costs paid to financial institutions for processing savings bond applications, such as printing, mailing, storage, and fees. At the time, the U.S. Treasury estimated that ending the sale of paper savings bonds would save $120 million over five years.

Today, savings bonds continue to be sold primarily through TreasuryDirect’s website. The online process still allows you to give bonds as gifts, but you’ll need the recipient’s Social Security number, and you’ll both have to set up online accounts.

There is one exception to the elimination of paper savings bonds: taxes. Taxpayers who want to use their tax refund to buy bonds will receive them in paper form, issued in their name, or the names they choose as primary owner or beneficiary. 

Pro Tip

The return on a bond is usually much less than a stock, but it’s also much less risky because it’s backed by the U.S. federal government.

Types of Savings Bonds

There are two types of U.S. savings bonds: Series EE bonds and Series I bonds. Here’s a quick explanation of each type:

Series EE bonds earn a set fixed interest rate when you purchase the bond. New interest rates are announced on May 1 and Nov. 1 of each year and apply to all bonds purchased for the following six months. Regardless of the interest rate, Series EE bonds are guaranteed to double in value after 20 years as long as you don’t cash them in before then.

Series I bonds earn both a fixed interest rate and a variable interest rate that reflects inflation. The 7.12% composite rate announced last November attracted a new round of investor interest, Collin Martin, director of fixed income at the Schwab Center for Financial Research, recently told NextAdvisor. It’s no wonder: The rate is a step up from the 5%-6% annual return average for government bonds since 1926, and is closer to the average annual stock market return of almost 10% during that period, according to Morningstar Direct. Note that the bonds aren’t guaranteed to reach a certain value at maturity. 

Both Series EE and Series I bonds have a maximum maturity period of 30 years, at which point you’ll stop earning interest. Bonds can be cashed in early starting at the one-year mark for their current value. However, you’ll lose three months’ worth of interest if you cash in before five years have elapsed. 

The Bottom Line

Savings bonds have always served two purposes throughout history: funding the government and creating an avenue for Americans to save long-term, according to research by Peter Tufano and Daniel Schneider.

Their popularity may ebb and flow, but they can still be a good investment for beginners.  The low cost of entry — a minimum of $25 — makes it easy to start. And if you’re already a seasoned investor, savings bonds can be a strategic way to diversify your portfolio and manage your risk.

As stocks remain volatile due to the pandemic, investments like savings bonds are a stable comparison. Investors have fled toward bonds since the S&P 500 index started selling off in late February, according to Troy Harmon, CFA, and chief investment officer at Henssler Financial, a Georgia-based financial advising firm. Of course, in exchange for their safety as an investment, bonds tend to have much lower yields.

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