Savings Bonds and Treasury Securities

Thursday, February 2nd, 2006
Categorized as: Savings Bonds and competitive investmentsSeries I US Savings BondsTIPS

Why does the U.S. Treasury finance part of the national debt with Savings Bonds rather than with Treasury notes and bonds that are much cheaper? T-bonds with a maturity of 5/15/30 are trading with a yield of about 4.7% this morning while the rate on I Bonds is 6.73%.

Tom’s Response

If you compare apples to apples – Series EE bonds to T-notes and Series I bonds to TIPS, you’ll find that the Savings Bonds actually pay less than marketable Treasury securities.

The T-bond rate you quote is best compared with the current EE Savings Bond rate of 3.20% – a discount of 1.5 percentage points.

As for I bond rates, right now 10-year TIPS have a base rate of over 2% while I bonds have a base rate of 1%. Both receive the exact same inflation boost on top of that.

With I bonds, the inflation is added to the interest rate, so it’s big and obvious. With TIPS, inflation is used to adjust the principal, so nobody notices.

Savings Bonds have other differences from marketable Treasury securities that make them attractive to individual investors, including:

  • tax-deferral
  • protection from the risk of capital loss when interest rates rise
  • much lower investment levels

On the other hand, paper Savings Bonds cost the Treasury more in support costs than marketable securities, which is why they have lower rates.

However, as more and more Savings Bond investors turn to TreasuryDirect, there will be less of a reason for the Treasury to offer Savings Bond holders the smaller carrot.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

5 Comments

On February 3rd, 2006 Mario said:

I suppose you can also answer this question by looking at current CPI numbers since the 6.73% adjustment. It’s gone way downhill since then. In fact, inflation has to make up 4% (annualized) in the next six months just to break even on the variable rate!

Tom, I wanted to ask your thoughts/predictions on the next I bond rate period. It appears we’re in for a very low rate. But, this might compel the treasury to finally hike the fixed rates, so that the I bond stays competitive with the alternatives. If that is a substantial increase, it might be worth buying even if the composite rate is initially low.

On February 3rd, 2006 Tom Adams said:

Mario – I’d like to wait and see the next CPI number, which will be released on Wednesday, Feb 22, before creating a stir about this.

You are correct, of course. If there is no recovery in the CPI level by March (the numbers are released in April), the I bond inflation component could be negative for the first time since I bonds were introduced.

However, if you look at my Series I Saving Bond inflation component graph, you’ll see that a CPI dip like this also happened at the end of 2001.

That time it recovered by March, but just barely, and I bond investors were treated to the lowest inflation component to date, just 0.56%.

On February 22nd, 2006 Tom Adams said:

The January CPI was released today – please continue this discussion here.

On June 10th, 2009 Steve said:

I don’t understand why the fixed rate is not higher for I bonds than it currently is. It would seem to me that the more public debt we have the more attractive the rates for I bonds would be to help finance the debt.

On June 10th, 2009 Tom Adams said:

Steve – all us minnows agree with you. The sharks, on the other hand….

Tom Adams

Comments Closed

June 1, 2010

After six years, over 400 posts, 3,680 real comments, and over 90,000 spam comments (thank you, Akismet, for making managing a blog with comments possible), I am closing public comments on Savings-Bond-Advisor.com. I will contine to update the main articles on this site, but not the comments.

Virtually every question about Savings Bonds has been asked and answered on this site multiple times. Use the search feature (see the box in the gray area near the top of this page) or the detailed menu on the lower part of the home page to find the information you're looking for. If you have a copy of Savings Bond Advisor, you can ask me a question here.

Tom Adams

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