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Series I Savings Bonds vs. Treasury Inflation-Protected Securities

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I recently purchased a bunch of Series I Savings Bonds because of the favorable fixed interest rate (1.20% if you managed to score some in April 2008) and the favorable future inflation-pegged interest rate (~2.4%). The Series I is popular because you do get to lock in both a fixed rate plus an inflation based rate. The fixed portion is set when you buy it and the inflation portion is pegged to CPI-U. If you can get protection against inflation through a Series I, why does a Treasury Inflation-Protected Securities (TIPS) even exist?

Similarities

The two notes, while having the same aim, have very little in common outside of characteristics that make them both government bonds. One of the few similarities they share deals with tax considations. Earnings from both are exempt from state and local income taxes but still subject to federal income tax. That’s where the similarities end.

Differences

The primary difference between the two is in how the inflation is factored into the equation on the note’s yield. With the Series I bonds, the inflation portion of the interest rate is announced every May and September and is integrated into the yield of the bond for the next six months according to the rate equation.

With the TIPS, the interest rate of the bond is set at auction when you purchase the bond and the principal is adjusted every six months with inflation. At maturity, the TIPS bond is valued at higher of the inflation adjusted principal and the original principal, so you can’t lose your principal because of deflation.

Another big difference is how often interest is paid and how it is taxed relative to spending on education expenses. Series I accrues interest on a monthly basis and pays out when the bond is redeemed. TIPS pay out interest twice a year. The Series I earnings may be exempt from Federal taxes if they are used to finance education.

There is one final significant difference between the two with regards to redemption and trading. You can sell a TIPS on the secondary market, meaning I can sell you my TIPS, but you cannot sell a Series I bond. In fact, you can’t redeem a TIPS prior to its maturity, you can only sell it (when it matures, you’re “selling” it back to Uncle Sam).

There are other details such as minimum maturity period, minimum bond purchase and other details but I didn’t think those were important for the basis of comparison. It’s hardly significant that the minimum purchase for an I bond is $25 versus $100 for TIPS. Oh, one entertaining difference is that you’re limited to $5,000 in paper and another $5,000 in electronic Series I bonds each year; the limit for TIPS is $5 million each of 5-, 10- and 20-year Treasury TIPS each year. :)

As you can see, there are many more differences than there are similarities between the two notes despite both having an inflation component. It appears that TIPS provide more cash flow but Series I is better if you plan on funding education with it in the future.

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4 Responses to “Series I Savings Bonds vs. Treasury Inflation-Protected Securities”

  1. Ceo Reom says:

    Interesting write up; thanks Jim.

    I brought some Series I too back when you posted about them a few months ago. Then I kept running into talks about TIPS and had no clue what the differences were. Timely introduction by you :D

    Btw, do you plan on converting your paper securities to electronic? I was thinking about it but wasn’t sure if it’s worth the extra step. Any notable advantages?

  2. Ceo Reom says:

    Oh nevermind!

    I didn’t see your recent post……how coincidental. Thanks :)

  3. Brian Patrick says:

    This statement got my attention:

    “Oh, one entertaining difference is that you’re limited to $5,000 in paper and another $5,000 in electronic Series I bonds”

    I’ve been buying Series I bond 26 times a year(every pay day) since 2006. Originally $50 but now $100. I have more than $5000 worth of I Bonds.

    What’s the above quote mean to me?


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