Can Savings Bonds Lose Value? The Risks Explained

U.S. savings bonds, such as Series EE and Series I bonds, are debt instruments issued by the United States government. These bonds are generally viewed as secure and low-risk investment options for individuals, providing a stable savings avenue. Many perceive them as entirely risk-free, yet their actual value can be influenced by specific circumstances, leading to a perceived diminishment.

Factors Affecting Savings Bond Value

Early redemption can reduce a savings bond’s immediate value. Both Series EE and Series I savings bonds are subject to a penalty if redeemed prematurely. If a bond is cashed in before it has been held for five years, the bondholder forfeits the last three months of accrued interest. For example, if a bond is redeemed after two years, the investor would receive interest only for the first 21 months, losing the interest earned during the final three months of that period. This penalty directly reduces the amount received upon redemption compared to what would have accumulated without the early withdrawal. While bonds can generally be redeemed after a minimum holding period of 12 months, this interest forfeiture acts as a disincentive for short-term withdrawals.

Understanding Interest and Redemption

Savings bonds grow in value by accruing interest over time, with interest typically compounded semiannually. This means that interest earned is added to the bond’s principal, and subsequent interest calculations are based on the new, larger amount, allowing the value to grow gradually. Series EE bonds, for instance, earn interest for up to 30 years from their issue date. These bonds are also guaranteed to at least double in value over a 20-year period from their issuance.

Similarly, Series I bonds also earn interest for a maximum of 30 years. A bond’s interest accrual ceases once it reaches its final maturity date. Holding a bond beyond this point means it will no longer earn any additional interest. Individuals can check the current value of their electronic savings bonds by logging into their TreasuryDirect account, or they can use the TreasuryDirect website’s calculator for paper bonds.

Inflation’s Impact on Purchasing Power

Distinguishing between a bond’s nominal value and its real value is important when considering savings bonds. The nominal value, the stated amount plus accrued interest, is guaranteed by the U.S. government. However, the real value refers to the bond’s purchasing power, or how many goods and services it can buy. Inflation, which is the general increase in prices over time, can erode this purchasing power.

Series I bonds are specifically designed to address this by offering an inflation-adjusted interest rate. Their interest rate is a combination of a fixed rate and a variable inflation rate, which is adjusted every six months based on changes in the Consumer Price Index for all Urban Consumers (CPI-U). In contrast, Series EE bonds issued after May 2005 earn a fixed interest rate, meaning their real return can be significantly impacted by inflation, as their growth does not adjust to inflation. While deflation can cause the variable rate of an I bond to drop, the combined rate will not fall below zero, safeguarding the initial investment.