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Laddering Series I Treasury Bonds

In my last post discussing Series I Savings Bonds as an investment [3], 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 [4] 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 [5]. 🙂

(Photo: sbluerock [6])