When Is the Best Time to Invest in a Savings Bond?

Photo illustration to accompany article on when to invest in savings bonds ©Getty Images

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In the wake of the financial crisis caused by the COVID-19 pandemic, investors scrambled as stock markets saw volatility only previously seen twice in history. The risks of investing in stocks suddenly stand in contrast to an age-old investment vehicle known for its security and stability: savings bonds. 

So how do savings bonds work, and what makes them stand apart in times of economic crisis? We reached out to industry experts to find out whether now is the time to invest in savings bonds.

When to Invest in a Savings Bond 

While savings bonds are significantly less affected by market volatility, there are a few factors you should take into consideration to decide when to invest in savings bonds.

Fixed interest rates

The U.S. Treasury announces new rates every six months. Wait until just before the new rates are announced – the end of April and the end of October – and look for expert predictions on what the new rates will be. If they’re predicted to decrease, purchase your savings bond before the new rates go into effect. If experts think they’ll go up, wait until after the first of the month.

Inflation

Since Series I bonds are inflation-based and don’t have a guaranteed value at maturity, inflation is a major factor in deciding which bond type to purchase and when. They are not guaranteed to double after 20 years like a Series EE bond. If we see a period of low inflation, this can potentially cause Series I bonds to fall behind in value compared to a Series EE bond. 

Time

How long do you plan to let your savings bond mature? If you want to cash out after a few years, a Series I bond will usually promise a better return. Series EE bonds carry a lower interest rate until they reach maturity.

Liquidity

Money invested in savings bonds isn’t as liquid as other types of accounts and investments. Make sure you have enough liquid assets on hand that tying money up in savings bonds won’t put you in a pinch later on.

Pro Tip

Regardless of market conditions, experts say it’s a good strategy to have a small portion of bonds in your investment portfolio because they create stability and counteract any declines in stocks.

Advantage and Disadvantages to Savings Bonds

With any investment, there are pros and cons to take into consideration. While savings bonds are one of the safest investments you could make, it’s also important to consider the cons.  

Advantages

“I see savings bonds as a starter for investing, and it’s really simple to start,” said Troy Harmon, CFA, and chief investment officer at Henssler Financial, a Georgia-based financial advising firm. “The best reason to buy bonds is for security. Coming out of the pandemic, we’re not going to have a consumer that’s as healthy, and we’re going to see business failures.” 

Historically, bonds have been a good alternative to stocks during times of trouble in the economy – a way to make sure your money is safe.

There’s also a low minimum investment to buy into the savings bond market. Unlike the majority of other investments, you can purchase a savings bond for as little as $25. When you buy a savings bond, you’re putting your money into the government’s hands and agreeing it will pay you back in interest throughout a bond’s maturity. This feature makes bonds a safe long-term investment –  in fact, the longer you hold the bond, the more it’s worth. So if you’re investing in bonds long-term, you will reap greater rewards down the line. 

Another pro: savings bonds are exempt from local and state taxes. While any interest you earn is fair game on your federal taxes, you won’t have to pay it until your bond is cashed. But there are exceptions. For example, bonds used to finance education won’t be subject to any taxes. You can use savings bonds to start a tax-free college fund for your young child without worrying about penalties for paying tuition.

Disadvantages

Savings bonds traditionally have low interest rates, which can be a good and a bad thing. A low return, in this case, is a tradeoff for a safe investment.

With current market conditions in mind, Harmon said the best reason to buy savings bonds is for security, but longer-term they’re not attractive since they yield very small returns compared to other investments.

Inflation is also a risk to consider when investing in savings bonds. As a general rule of thumb, inflation slashes the interest you earn on investments, like savings bonds, and erodes wealth over time. A way to combat it is through Series I bonds since interest payments change along with the inflation rate, protecting your money during high times of inflation.

Savings Bonds vs. Certificates of Deposit (CDs)

Both savings bonds and certificates of deposit (CDs) are considered safe, low-risk investments with moderate returns. They are solid options if you’re looking to invest your money with little risk, but they have different features to take into account. 

Savings bonds are essentially a loan to the government that pays you back interest over a long period of time – anywhere between three to 30 years – but the returns are usually lower. CDs are a savings vehicle issued by a bank or credit union and tend to generate higher yields. The span of maturity for a CD can last anywhere from 10 days to 10 years, and rates vary from bank to bank. Neither is 100% risk-free, but both are considered some of the safest investments around. 

When debating whether to invest in savings bonds or CDs, the answer greatly depends on your risk tolerance and need for cash. It’s important to evaluate several other factors, such as your financial goals, interest rates, and timeline for saving. 

Harmon said Treasury savings bonds are not paying as much interest right now, so buying CDs would get you a slightly higher return. However, Treasury bonds are more liquid, than a bank-held CD< which is likely to come with early withdrawal penalties. 

“Investing is a bit different assuming you intend to hold the position until it matures. If that is the case, buy the CD,” Harmon said. “However, if you believe you might have to sell it prior to maturity, the Treasury will give you more price stability.”

In Conclusion

Savings bonds are a safe way to invest during uncertain times. But in the end, it’s all about balance. While savings bonds are low in risk, they often can’t match the potential returns found in other riskier types of investments.

“High-quality bonds are almost always an important piece of a well-diversified portfolio,” says Andy Mardock, founder and president of ViviFi Planning in Bend, Oregon. “For my clients, the answer is to balance the risk of stocks while still generating income.”