How to Buy Savings Bonds or Treasury Bonds

Something I recently learned — or maybe it's something that I just recently noticed — savings bonds and treasury bonds are not the same thing.

What treasury bonds and savings bonds have in common is that they are both securities issued by the United States Treasury Department. As with other bonds, you're loaning the government money, and getting repaid with interest.

That's about whether the similarities end, and their differences are far more important. In this post, I talk about the differences between treasury bonds and savings bonds. I also cover how to purchase savings bonds.

I explained how to buy treasury bills and notes (also known as T-bills and T-notes) in a previous post. Buying treasury bonds follows the same process as buying notes. Bonds just have longer terms.

What to Know About Treasury Bonds

Treasury bonds:

1. are available with a maturities of 20 or 30 years;¹
2. can be held until maturity or sold on the secondary bond market; and
3. are sold at auction.

You can place a competitive auction bid through a broker. Or you can place a non-competitive bid either with a broker or through TreasuryDirect.gov. It's the same process as buying a treasury note.

As with treasury notes, treasury bonds earn a fixed interest rate for the duration of the bond. This rate is never less than 0.125%. It's paid every six months.

Treasury bonds, like notes, often sell at a discount to their face value. You might pay $99.30 for a $100 bond. They don't always sell at a discount, however. I learned this the hard way when I ended up paying $104 per $100 for a treasury note in a recent reopening (through the non-competitive bidding process).

If you purchase bonds through TreasuryDirect, you can purchase them in $100 increments with a $100 minimum. Brokerages typically sell bonds in $1,000 increments with a $1,000 minimum.

Purchasing limits for treasury bonds

You can buy up to $10 million worth of treasury bonds per auction with a non-competitive bid. If you're making a competitive bid, you can purchase up to 35% of the offering amount.

Offering amounts tend to be in the billions. I wouldn't worry about reaching that limit unless you're like Jeff Bezos or a bank.

How Savings Bonds Are Different

Savings bonds:

1. earn interest monthly that gets compounded semi-annually for up to 30 years;
2. cannot be sold to another party because they're issued to a social security number;
3. can be redeemed after one year, with a 3-month interest penalty if you redeem before five years; and
4. have a minimum purchase of $25.

In other words: treasury bonds can be resold before reaching maturity, but not redeemed; savings bonds can be redeemed, but not resold.

Types of savings bonds

There are two types, or series of savings bonds: Series EE and Series I.

Series EE bonds pay a fixed rate of interest for 30 years. The Treasury Department guarantees that the value of an EE bond will double after 20 years. Series EE bonds currently pay 2.102.502.70%.

Series I bonds earn a composite rate of interest. This rate is composed of a fixed, base rate that remains the same over the life of the bond, and an inflation rate. The inflation rate is pegged to the Consumer Price Index for all Urban Consumers (CPI-U) and changes every six months.

As of November 1, 2022, Series I bonds have a 0.40% base rate and an inflation rate of 6.48%, for a composite rate of 6.89%.As of May 1, 2023, Series I bonds have a 0.90% fixed rate and an six-month inflation rate of 1.69%, for an annual composite rate of 4.30%.As of May 1, 2024, Series I bonds have a 1.30% fixed rate and an six-month inflation rate of 1.48%, for an annual composite rate of 4.28%.

One risk of Series I bonds, of course, is that this composite rate can fall when the rate of inflation falls. For example, the rate from November 1, 2022 through April 30, 2023 was 6.89% — a 0.4% base rate and an inflation rate of 6.48%.

Interest rates for Series I bonds are set twice per year, on May 1 and November 1. When you purchase a Series I bond, you'll earn interest at whatever rate was in effect at the time of purchase for the following six months. Say, for example, you purchase a Series I Bond at 4.30% on April 30. It has a fixed rate of 0.4%. That bond will accrue interest at 4.30% until November 30 of that year. From December 1 of that year, it will accrue 0.4% interest, plus the latest composite rate set on November 1.

Should the rate drop too low, you can redeem the savings bond. Be aware that you'll have to pay taxes on the interest you've earned when you redeem them.

How to Buy Savings Bonds

I'm going to focus on electronic bond purchases, since it's what I have the most experience doing. Almost none of this advice applies to paper bonds. You can only purchase paper bonds using your tax refund.

To buy electronic savings bonds, you'll need to have or create an account with TreasuryDirect.gov. Electronic savings bonds are only sold through TreasuryDirect. Unlike treasury notes and bonds, savings bonds do not have an auction process.

Link your TreasuryDirect account to a bank account. This account is how you'll fund purchases and receive redemption payments²

Electronic savings bonds have a minimum purchase value of $25. Unlike treasury bonds, which are sold in $100 increments, savings bonds can be purchased to the penny. You can absolutely buy a savings bond for $25.39 or $9,962.44.

You can also fund savings bond purchases through TreasuryDirect's Payroll Savings Plan. Using this plan automates your savings.

Setting up payroll savings bond purchases

First, log into TreasuryDirect and enroll in the Payroll Savings Plan program (it's part of the ManageDirect menu). Set or choose your bond's registration (the owner), the type of bond (Series EE or Series I), and your purchase amount.

Then provide TreasuryDirect's details to your employer's payroll department.

• Use TREASURYDIRECT as the bank name (all upper case, no spaces).
• The routing number is 051736158.
• Add an upper case P at the end of your 10-character account number (i.e. if your account number is A987654321, use A987654321P).

I copied and pasted the bank name and routing number straight from the Payroll Savings Plan page. Verify those details on that page in case they've changed. It does not matter whether you set TreasuryDirect as a checking or savings account. Either works with the TreasuryDirect system.

You can deposit any amount from your paycheck, provided your employer's payroll software supports it. If the deposit is less than your purchase amount, your cash will be held in a Payroll Zero-Percent Certificate of Indebtedness until you reach your purchase threshold.

Here's an example. Say you set a purchase amount of $25. You then deposit $12.50 from every paycheck. That first $12.50 gets held as a Payroll Zero-Percent Certificate of Indebtedness until TreasuryDirect receives your second payroll deposit of $12.50. Then your bond purchase gets processed. It just shows up in your TreasuryDirect account.

Purchasing limits for savings bonds

Savings bonds have much lower purchasing limits than treasury bonds. Individuals can buy a maximum of $10,000 per year, per social security number and per series. You can buy up to $10,000 in Series EE bonds, and $10,000 in Series I bonds using TreasuryDirect.

Married couples can purchase $10,000 of each bond series per spouse. However, you'll both need to have TreasuryDirect accounts.

The purchase limit counts against the person named first in the registration when more than one person is named. Just swap the order of your names in each account. Jane Doe can buy bonds in her account for Jane Doe and Jill Smith. Jill Smith can buy bonds in her account for Jill Smith and Jane Doe.

You can buy an additional $5,000 in paper Series I bonds using your tax refund.

What happens if you reach purchase limits?

Once you reach the annual purchase limit for one series — congratulations for having $10,000 extra dollars! — your options are to:

• change the bond series type for the remainder of the year; or
• stop your payroll and bank deposits until the new year.

If you forget, TreasuryDirect will send emails telling you that you can't buy any more savings bonds, so stop trying!

Excess payroll deposits will be saved as a Payroll Zero-Percent Certificate of Indebtedness. Excess bank deposits will be held as a Zero-Percent Certificate of Indebtedness. A Payroll Zero-Percent Certificate of Indebtedness can only be used to buy savings bonds. You can use a non-payroll Zero-Percent Certificate of Indebtedness to buy treasury bills, notes, and bonds.

Conclusion and a Disclaimer!

Savings bonds and treasury bonds are part of a diversified portfolio. Both are flexible, low-risk ways to save and invest. How much of your portfolio to allocate to United States securities depends on your investment objectives and risk tolerance.

As always, remember that I am not a finance professional. I like to think that I give good advice and that my opinions are correct, but that may not be true. When in doubt, consult an actual financial advisor. Or visit your local library for some investment books. How do you think I found the hubris to share personal finance tips on the internet?