Series I bonds versus bank CDs

Thursday, May 4th, 2006
Categorized as: Savings Bonds and competitive investmentsSeries I US Savings Bonds

It’s difficult to see how I bonds are a good deal when 1-year bank CDs are paying over 5%. Do you think the I bond “variable” portion truly compensates for inflation?

Tom’s response

Series I Savings Bonds and bank CDs have some similar features, but the I bond has other features that bank CDs lack.

Unlike a bank CD, the I bond:

  • protects you from the risk of inflation
  • allows you to defer federal income tax on the interest you earn
  • is exempt from state income tax
  • pays interest for 30 years

CDs don’t have the inflation or tax features and aren’t normally available for terms longer than five years.

Although these features are more valuable to some people than to others, they do have value. Because of that value, I bonds should have lower rates than CDs. If they have the same rate, the I bond is definitely the better deal.

Each individual investor has to determine how valuable the features of the I bond are in his or her situation and make the choice.

Looking back 10, 25, 50, and 100 years, you’ll find the I bond inflation yield runs in the range of about 2.5% to 4%. If you’d like to have a better understanding of inflation, my book has a detailed look, including several graphs, that go back as far as 1800.

When you add that to the new I bond base rate of 1.4%, you get 3.9% to 5.4%. Over 30 years, tax-deferral can add .5% to 1.5% to the annual yield (the higher the yield of the investment and your tax bracket, the higher the tax-deferral yield).

You are also protected from hyperinflation, which is what happens to undeveloped countries that get mired in the kind of government, trade, and personal debt the U.S. is in. No one knows if that happens to developed countries or not.

Assuming you’re ok with the CPI as a measure of inflation, the I bond truly compensates for inflation over periods longer than a year, but because the rates change every six months some odd things happen.

For example, last November the I bond inflation component was 5.7% and now it’s 1.0%. Those combine into an annual rate of 3.35%, which is the rate of inflation over the whole year.

3.35% plus a 1% base rate give a yield of about 4.35%, which is competitive with what CDs were paying last November.

Likewise, today’s I bonds could be quite competitive with today’s CDs, but we won’t really know until October when we find out what the inflation component will be for their second six-month rate period.

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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:


On June 1st, 2006 Uve Jerzy said:

I must not be a sophisticated enough investor. I read the relatively recent hype about I-Bonds and the then 6.73% rates and how good of an investment that was. I also attempted to understand just how that rate was determined. I guess I must just be too stupid to figure out that the rate can drop to less than what my checking account offers, and far less than could be obtained with CD’s.

Stupid me – but it would be nice if those that hype these crap investments also had to disclose, in an honest manner and in plain English, just what the downside is.

Ah, but this is America, home of the financial analysts who have collectively lost contact with the concept of honest and meaningful disclose.

So now I am stuck with tens of thousands in this completely underperforming asset. And they say Lay and Skilling and the Enron gang were crooks!

On June 2nd, 2006 Tom Adams said:

Uve – You’re being a little hard on yourself and America.

For the reasons explained in the above post, I bonds continue to be a decent investment. Sure the low level of the inflation component is a disappointment, but it’s only for six months. Meanwhile, the 6.73% you’ve already earned was a very high rate.

No one makes any commissions or fees from selling Savings Bonds, so you leave us wondering who hyped Savings Bonds to you or what incentive they’d have to do so.

On June 5th, 2006 Dan said:


I’ll be more than happy to hype I-bonds for you!

The thing I think most people overlook is that, after the 1-year mandatory holding period, savings bond money in a Treasury Direct account is just as accessible as money in an hi-yield online account like ING, but with tax-deferral that can be stretched out as far as thirty years.

The way I look at I-bonds is (after the initial 1-yr holding period) they are the PERFECT place to make regular contributions toward the 3-6 months of emergency money that seems to be universally recommended.

Think about it: We’re advised to have our emergency money in an easily accessible account and in an investment that’s uber-safe. And where else can you satisfy both of these requirements AND (1) defer federal taxes; (2) eliminate state taxes; (3) greatly reduce inflation risk; (4) require as little as $25 per purchase; and (5) yield returns that (on average) rival CD’s?

So what if the current 6-month rate is near 2%? For the year an I-bond purchased last November averages out over 4%, which is close to (if not better than) 1-yr CD yields that were available at the time.

And if you contribute regularly, then when an emergency (or a better investment opportunity) does happen, you can chose to redeem the lowest fixed-rate of your I-bonds first. If they’re never needed, you can leave the higher fixed-rate of your I-bonds gaining interest tax-deferred for 30 years. What CD or savings account is gonna do that for you?

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 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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