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Laddering Series I Treasury Bonds
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In my last post discussing Series I Savings Bonds as an investment, JQ asked if it made sense to put your emergency funds into Series I bonds because of the higher interest rates. With 12-month CD rates around 1%, the current 4.60% APY yield of Series I bonds look very attractive.
How to Ladder Series I Bonds
Series I Bonds cannot be redeemed within one year of being purchased and so you would have to build your ladder one rung at a time, starting at the one year mark. I would take one month’s savings and purchase a Series I Bond, thus starting the clock on that sum immediately. After each month, I’d buy an additional month’s worth of Series I bonds until my ladder was complete. If you had $6,000 saved, I’d buy a $500 Series I savings bonds each month for 12 months.
Why break it up into different rungs? Why not purchase twelve $500 Series I bonds immediately? The reason is so that you have protection in the event you do need the funds for some emergency before they are redeemable. Since you cannot withdraw the funds, you want to keep some of it liquid until you get to the point where you are able to redeem some of your Series I Bonds.
Why This May Be a Good Idea
The most compelling reason why you may consider doing this is the higher interest rates. The interest rates are in part indexed to inflation, unlike CD rates, so you do get a bit of protection on that score. The interest rates on I Bonds aren’t totally fixed and so there’s a risk that they fall below that of CD rates. If you will recall, I Bonds have a fixed rate and an inflation rate that combine together to form the actual rate. The fixed rate stays with the bond for life whereas the inflation rate is recalculated, based on CPI-U, every six months.
Why This May Be a Bad Idea
The big reason why this might be a bad idea is that you cannot redeem a Series I bond within a year. If you redeem it before five years, you will suffer a three month interest penalty. With CDs, you face an interest penalty but you can always withdraw your funds. The potential problem you face is a sudden need for funds but no access to them, even with the prospect of a penalty. Let’s say you have six months of expenses saved and you suddenly need three months. With a CD, you just close three rungs of your ladder, take your interest rate hit, and you can fulfill your needs. With a Series I bond, you can’t close three rungs. You’re in trouble… all for a few more percentage points.
As for the penalty for closing early, if you redeem a bond before 5 years, you take a three month interest hit.
Finally, you are only allowed to purchase $10,000 in electronic Series I bonds and $10,000 in paper bonds ($5,000 of each individually, I’m married so I can buy $5,000 and my wife can buy $5,000). If your emergency fund is greater than $10,000, then you have to add a layer of complexity to your process by buying paper bonds and converting them to electronic bonds. It won’t affect your strategy, it’ll just involve more work.
Laddering Series I bonds just isn’t something that appeals to me because it involves a lot of work and a lot of tracking. The interest rate is appealing but I feel like my time is better spent focusing on other things. I’m perfectly content with my ladder of CDs. 
(Photo: sbluerock)
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Isn’t the annual purchase limit $5,000 for electronic I Bonds and $5,000 for paper? Or were you referring to the limit for a married couple?
Shoot you’re right, I was referring to MY limit (and I’m married).
Also, while you are limited in the amount you can purchase each year, that is an *annual* limit. So, in order to put more than $10K in the bonds, don’t you just spread it over more than one year of investments? It’s a long, slow process of migrating to it anyway (just adding in $500/mo. in your example).
Your last comment about how this does not appeal to you due to all the work and the tracking… I have to disagree that this would be “a lot of work.”
Through the Treasury Direct site, you can schedule recurring investments into Series I Bonds. Name the amount of each investment, the frequency, when to start, when to stop, what account (checking, savings, etc…) to draw the investment from and you’re all set! Sure, you may want to check in occassionally to make sure it’s all running right, but that’s it.
If this is something that makes financial sense for someone, I think a one-time set-up could be worth the effort.
This is a great idea. Even though the Fed has not raised interest rates they will in the future. Higher interest rates will be coming and by laddering a portfolio of I bonds will allow you to take advantage of the higher rates while always having something coming due.
It seems like there should be a way to sell savings bonds earlier than a year, i.e. transfer a $100 bond to someone who will pay you $90 for it.
Anyway, I use savings bonds for intermediate term savings; money that I’m pretty sure I won’t need in less than a year, but might want within the next 5 years, e.g., saving for a house. So I don’t care very much about not being able to redeem earlier than one year.
You can’t sell Series I bonds, there’s no way to change the name and transfer it.
Ok, the FAQ at http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_ifaq.htm says “by regulation, a savings bond is a registered security and ownership is non-transferable”.
But the FAQ at http://www.treasurydirect.gov/news/faq/faq.htm says “The “Gift Box” function allows customers to buy savings bonds for someone else and keep the bonds in their own account until they are ready to give them to the recipient. Once the purchaser knows the recipient’s required information – his or her full name, social security number and/or taxpayer ID number and address – and has confirmed that the recipient has established a TreasuryDirect account, he or she can transfer the gift into the recipient’s account.”
That kinda sounds like if you explicitly designate a savings bond as a gift when you buy it, you have the option of transferring it to someone else one time.
Well, yes, you could do that. But then you’d already have to have that future “buyer” of your bond already lined up, because you’d need enough of their personal info to go through the process you’ve outlined.
Question is, if you’re already lining up who you’re going to sell the bond to, why are you buying the bond in the first place?
No, this option really is only for the case in which you want to make a gift of the bond and you already know who you are giving it to.
Didn’t I ask the original question?
Well, you certainly started that discussion…
This is a great article stating the major pros and cons, and the follow-up comments are terrific too! Thanks to all!
as you stated, it just seems like way too much work and tracking to be worth it.