How Savings Bonds Work

U.S. savings bonds are investments backed by the government. Here's what you should know before you purchase one.
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With a history dating back to 1935, U.S. savings bonds are a time-honored option for long-term savings. But whether they are your best option depends on a few factors.

Because they are both issued by the U.S. government, people sometimes confuse savings bonds and Treasury bonds, but there are important differences between them. But because both are long-term savings options, both can be considered alongside alternatives such as savings accounts, money market accounts, and CDs.

Here is a look at some of the characteristics that distinguish savings and Treasury bonds, and how they stack up against other low-risk savings vehicles.

The Difference Between Treasury and Savings Bonds

Here are some of the key similarities and differences between Treasury and savings bonds:

Guarantee of Principal

Both have principal backed by the U.S. government. With savings bonds, the principal is held steady throughout the life of the bond, while the face value of the Treasury bond is only guaranteed at the maturity date.

Liquidity Limitations

Savings bonds cannot be redeemed within their first year of issuance, and there is a penalty for redeeming them within the first five years. Treasury bonds can be bought and sold on public markets at any time, but you are not guaranteed to get the full value if you sell prior to maturity.

Price Fluctuation

Because Treasury bonds are publicly traded, their price can fluctuate considerably between issuance and maturity. Bonds rise in price as interest rates fall and decline when interest rates rise, with the magnitude of these changes typically greater for bonds with longer maturity dates. Savings bonds, on the other hand, are redeemable for face value at any time, within the limitations noted above.


Both Treasury and savings bonds are assigned an interest rate upon issuance. With savings bonds, that is guaranteed to remain constant for 20 years, and then is reset for the next 10 years. With Treasury bonds, the effective yield varies as prices fluctuate, so the yield you get depends on when you buy.

Purchase Limitation

You can purchase an unlimited amount of Treasury bonds, while purchases of savings bonds are limited to $10,000 per individual each calendar year.

Tax Treatment

For both Treasury and savings bonds, interest is taxed at the federal level but not at the state level.

Savings and Treasury bonds versus bank accounts

Like savings and Treasury bonds, FDIC-insured bank accounts also offer a government guarantee. Here is a comparison between bonds and bank accounts:

The Extent of U.S. Government Guarantee

FDIC insurance is limited to $250,000 per depositor per bank, though you can insure more by opening accounts at multiple banks or opening a joint account with a spouse. Government backing of interest and face value on Treasury bonds is unlimited, and while it is also not limited to savings bonds, the latter is harder to accumulate in large amounts due to the annual purchase limit.


Savings and money market accounts are very liquid because the full value of these accounts is redeemable at any time. CDs and savings bonds carry penalties for early redemption, while Treasury bonds carry the risk of price fluctuations if you don’t hold them to maturity.


A key question is which type of instrument pays the most. Because savings bonds carry a penalty if redeemed within five years, the best comparison is with a five-year CD. A five-year Treasury bond can also be included in this comparison.

Tax Treatment

The exemption from state tax should also be factored into this in favor of Treasury bonds, especially if you live in a state with a high tax rate.

With some limitations, everything discussed in this article is an interest-bearing instrument whose value is backed by the U.S. government. Beyond that, savings bonds, Treasury bonds, savings accounts, and CDs each have their particular characteristics and restrictions. Which is right for you may depend on your specific situation, but with all things being equal, the best choice might come down to yield.

The relationship between bond yields and bank rates will change over time, as will the relationship between short- and long-term instruments. Doing a full range of yield comparisons, both between and within these categories, will help you make the most of your options.

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About Author
Richard Barrington has been a Senior Financial Analyst for MoneyRates. He has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications. Richard has over 30 years of experience in financial services. He has earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the “CFA Institute”).