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The definition of a U.S. Savings Bond is an investment in the federal government that helps to increase your money. By purchasing a savings bond, you are essentially lending money to the government which you will get back in the future, when the bond matures, with interest. Because these financial products are backed by the federal government, they are considered to be extremely low-risk. And, in certain situations, there can be tax advantages.

Here’s a closer look at these bonds, including:

•   What are savings bonds?

•   How do savings bonds work?

•   What are the different types of savings bonds?

•   How do you buy and redeem savings bonds?

•   What are the pros and cons of buying savings bonds?

Savings Bond Definition

First, to answer the basic question, “What is a savings bond?”: Basically, it is a loan issued by the U.S. Treasury and made to the U.S. government. Purchase a savings bond, and you are loaning the money you pay to the government. At the end of the bond’s 30-year term, you receive your initial investment plus the compounded interest.

You may withdraw funds before then, as long as the bond has been held for at least five years.

How Do Savings Bonds Work?

Savings bonds are issued by the U.S. Treasury. You can buy one for yourself, or for someone else, even if that person is under age 18. (That’s why, when you clean out your closets, you may find a U.S. Savings Bond that was a birthday present from Grandma a long time ago.)

You buy a savings bond for face value, or the principal, and the bond will then pay interest over a specific period of time. Basically, these savings bonds function the same way that other types of bonds work.

•   You can buy savings bonds electronically from the U.S. Treasury’s website, TreasuryDirect.gov . For the most part, it’s not possible to buy paper bonds anymore but should you run across one, you can still redeem them. (See below). Unlike many other types of bonds (say, some high-yield bonds), you can’t sell savings bonds or hold them in brokerage accounts.

How Much Are Your Savings Bonds Worth?

If you have a savings bond that has been tucked away for a while and you are wondering what it’s worth, here are your options:

•   If it’s a paper bond, log onto the Treasury Department’s website to find out the value.

•   If it’s an electronic bond, you will need to create (if you don’t already have one) and log onto your TreasuryDirect account.

Savings Bonds Interest Payments

For U.S. Savings Bonds, interest is earned monthly. The interest is compounded semiannually. This means that every six months, the government will apply the bond’s interest rate to grow the principal. That new, larger principal then earns interest for the next six months, when the interest is again added to the principal, and so on.

3 Different Types of Savings Bonds

There are two types of U.S. Savings Bonds available for purchase — Series EE and Series I savings bonds. Here are the differences between the two.

1. Series EE Bonds

Introduced in 1980, Series EE Bonds earn interest plus a guaranteed return of double their value when held for 20 years. These bonds continue to pay interest for 30 years.

Series EE Bonds issued after May 2005 earn a fixed rate. The current Series EE interest rate for bonds issued May 1, 2023 through October 31, 2023 will earn an annual fixed rate of 2.50%.

2. Series I Bonds

Series I Bonds pay a combination of two rates. The first is the original fixed interest rate. The second is an inflation-adjusted interest rate, which is calculated twice a year using the consumer price index for urban consumers (CPI-U). This adjusted rate is designed to protect bond buyers from inflation eating into the value of the investment.

When you redeem a Series I Bond, you get back the face value plus the accumulated interest. You know the fixed rate when you buy the bond. But the inflation-adjusted rate will vary depending on the CPI-U during times of adjustment.

The current composite rate for Series I Savings Bonds is 4.30% for I bonds issued from May 1, 2023 through October 31, 2023.

3. Municipal Bonds

Municipal bonds are a somewhat different savings vehicle but are worth a quick overview here, if only as a point of comparison. They are issued by a state, municipality, or country to fund capital expenditures. By offering these bonds, projects like highway or school construction can be funded.

Akin to loans that investors make locally to improve their area, these bonds (sometimes called “munis”) are exempt from federal and the majority of local taxes, making them perhaps more enticing to some investors. The market price of bonds will vary with the market, and they typically require a larger investment of, say, $5,000. Municipal bonds are available in different terms, ranging from relatively short (say, two to five years) to longer (the typical 30-year length).

How To Buy Bonds

You can buy Treasury Bonds directly through the United States Treasury Department online account system called TreasuryDirect, as noted above. This is a little bit different than the way you might buy other types of bonds. You can open an account at TreasuryDirect just as you would a checking or savings account at your local bank.

You can buy either an EE or I Savings Bond in any amount ranging up to $10,000 in penny increments per year. So, if the spirit moves you, go ahead and buy a bond for $49.99. The flexible increments allow investors to dollar cost average and make other types of calculated purchases.

That said, there are annual maximums on how much you may purchase in savings bonds. The electronic bond maximum is $10,000 for each type. You can buy up to $5,000 in Series I Bonds using a tax refund you are eligible for. Paper EE Series bonds are no longer issued.

If you are due a refund and you want to buy I Bonds, be sure to file IRS Form 8888 when you file your federal tax return. On that form you’ll specify how much of your refund you want to use to buy paper Series I bonds, keeping in mind the minimum purchase amount for a paper bond is $50, and the increments rise by $50. The IRS will then process your return and send you the bond that you indicate you want to buy.

The Pros & Cons of Investing in Savings Bonds

Here’s a look at the possible benefits and downsides of investing in savings bonds. This will help you decide if buying these bonds is the right path for you, or if you might prefer to otherwise invest your money or stash it in a high-yield bank account.

The Pros of Investing in Savings Bonds

Here are some of the upsides of investing in savings bonds:

•   Low risk. U.S. Savings Bonds are one of the lowest risk investments you could ever make. You are guaranteed to get back the entire amount you invested, known as principal. You will also receive interest if you keep the bonds until maturity.

•   Tax advantages. Savings bond holders don’t pay state or local taxes on interest at any time. You don’t have to pay federal income tax on the interest until you cash in the bond.

•   Education exception. Eligible taxpayers may qualify for a tax break when they use U.S. Savings Bonds to pay for qualified education expenses.

•   No fees. Unlike just about every other type of security, you won’t pay a fee, markup or commission when you buy savings bonds. They’re sold at face value, directly from the Treasury, so what you pay for is what you get. If you buy a $50 bond, for example, you’ll pay $50.

•   Great gift. Unlike most securities, people under age 18 may hold U.S. Savings bonds in their own names. That’s what makes them a popular birthday and graduation gift.

•   Patriotic gesture. Buying a U.S. Savings Bond helps support the U.S. government. That’s something that was important and appealed to investors when these savings bonds were first introduced in 1935.

The Cons of Investing in Savings Bonds

Next, consider these potential downsides of investing in savings bonds:

•   Low return. The biggest disadvantage of savings bonds is their low rate of return, as noted above. A very low risk investment like this often pays low returns. You may find you can invest your money elsewhere for a higher return with only slightly higher risk.

•   Purchase limit. For U.S. Savings Bonds, there’s a purchase limit per year of $10,000 in bonds for each series (meaning you can invest a total of $20,000 per year), plus a $5,000 limit for paper I bonds via tax refunds. For some individuals, this might not align with their investing goals.

•   Tax liability. It’s likely you’ll have to pay federal income tax when you cash in your savings bond, unless you’ve used the proceeds for higher education payments.

•   Penalty for early withdrawal. If you cash in your savings bond before five years have elapsed, you will have to pay the previous three months of interest as a fee. You are typically not allowed to cash in a bond before the one-year mark.

Here, a summary of the pros and cons of investing in savings bonds:

When Do Savings Bonds Mature?

You may wonder how long it takes for a savings bond to mature. The EE and I savings bonds earn interest for 30 years, until they reach their maturity date.

Recommended: Bonds or CDs: Which Is Smarter for Your Money?

How to Cash in Savings Bonds

Wondering how and when to redeem a savings bond? These bonds earn interest for 30 years, but you can withdraw penalty-free after five years.

•   If you have a paper bond, you can cash it in at your bank or credit union. Bring the bond and your ID. Or go to the Treasury’s TreasuryDirect site for details on how to cash it in.

•   For electronic bonds, log into your TreasuryDirect account, click on “confirm redemption,” and follow the instructions to deposit the amount to a linked checking or savings account. You will likely get the money within two business days.

•   If you inherited or found an old U.S. Savings Bond, you may be able to redeem savings bonds through the TreasuryDirect portal or via Treasury Retail Securities Services.

Early Redemption of Bonds

If you cash in a U.S. Savings Bond after one year but before five years, you’ll pay a penalty that is the equivalent of the previous three months of interest. Keep in mind that for EE bonds, if you cash in before holding for 20 years, you lose the opportunity to receive the doubled value of the bond that accrues after 20 years.

The History of US Savings Bonds

America’s savings bond program began under President Franklin Delano Roosevelt in 1935, during the Great Depression, with what were known as “baby bonds.” This started the tradition of citizens participating in government financing.

The Series E Saving Bond contributed billions of dollars to financing the World War II effort, and in the post-war years, they became a popular savings vehicle. The fact that they are guaranteed by the U.S. government makes them a safe place to stash cash and earn interest.

The Takeaway

U.S. Savings Bonds can be one of the safest ways to invest for the future and show your patriotism. These bonds can be especially great gifts for minors. But they can also add a risk-free guaranteed return to your portfolio. While the interest rates are typically low, for some investors, knowing that the money is being securely held for a couple of decades can really enhance their peace of mind.

Another way to help increase your peace of mind and financial well-being is finding the right banking partner.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What is a $50 savings bond worth?

The value of a $50 savings bond will depend on how long it has been held. You can log onto the TreasuryDirect site and use the calculator there to find out the value. As an example, a $50 Series I bond issued in 2000 would be worth more than $183 today.

How long does it take for a $50 savings bond to mature?

The full maturation date of U.S. savings bonds is 30 years.

What is a savings bond?

A savings bond is a very secure way of investing in the U.S. government and earning interest. Basically, when you buy a U.S. Savings Bond, you are loaning the government money, which, upon maturity, they pay back with interest.

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Pairs trading is a market-neutral trading tactic that allows investors to use the historical performance of stocks to place long and short bets to make big profits.

Pairs trading was first used in the mid-1980s as a way of using technical and statistical analysis as a way to find potential profits. It remained the province of Wall Street professionals until the internet opened online trading and real-time financial information to the public. Before long, there were seasoned amateur investors using pairs trades to make money, while managing their risk exposure.

What Is Pairs Trading?

Pairs trading is a day trading strategy in which an investor takes a long position and a short position in two securities that have shown a high historical correlation, but which have fallen momentarily out of sync.

The correlation between the two securities refers to the degree that two securities move in relation to one other. More specifically, correlation is a statistical measurement that measures the relationship between the historical performance of two securities.

It’s usually expressed as something called a “correlation coefficient.” This measure falls between -1.0 and +1.0, with negative 1 indicating that two securities move in exactly opposite ways. A correlation coefficient of positive one indicates that the two securities move up and down at exactly the same times under the same conditions.

What Types of Assets Are Traded in Pairs?

Numerous types of financial assets can be traded in pairs, and the list includes stocks, commodities, options, funds, and even currencies. In one sense, the asset or security at the heart of the trade is somewhat irrelevant, as traders are looking to take advantage of the difference in value (and thus, a different investment position) between the two. Again, the whole goal is to try and beat the average stock market return.

Often, though, pairs trading is discussed in relation to stocks, as that may be the asset class that most trading discussions revolve around.

Pros and Cons of Pairs Trading

Pairs trading is something that most investors can take part in, assuming they know the risks of playing the market. That’s to say that there are pros and cons to pairs trading, and investors should review them before engaging in it.

Pros of Pairs Trading

The biggest pro to pairs trading is that there is the potential for profit, or at least bigger returns than investors may have otherwise generated by executing a different investing strategy. There’s also the potential to generate positive returns no matter what the overall market conditions are. Further, pairs trading may actually be a way to mitigate risk when investing in stocks, as there are only two trades involved, and in some ways, the mechanics of the trade setup can benefit the trader — but note that this is not to say that it’s a safe or risk-free strategy.

Cons of Pairs Trading

Cons of pairs trading include the possibility of the trading model failing due to faulty assumptions on the part of a trader — that is, historical correlation between two stocks may not mean that the correlation has continued. Traders should also know that pairs trading involves fast movements, and that there’s a chance trades may not execute at the desired time — this could stymie the strategy’s effectiveness. For traders, it may be worth looking at different stock exchanges and different investment platforms to get a sense of where the strategy may be the most effective.

It may also be helpful to understand the concept of stock volume in order to have a better chance of success with the strategy.

Pairs Trading Example

In a pairs trade, an investor will look for two separate securities that have a historically high correlation, but have fallen out of sync. If “stock Alpha” and “stock Beta” have historically risen and fallen in step, they’d have a very high correlation, maybe as high as positive of 0.95. But, for whatever reason, the two stocks have diverged, with Alpha racking up big gains, while Beta languished. That has knocked the short-term correlation coefficient between the two down to paltry 0.50.

This is the most common scenario for a pairs trade. In it, an investor will take a long position on stock Alpha, which has underperformed. At the same time, they’ll short stock Beta, which has outperformed. What they’re doing in a pairs trade is betting that the relationship between the two stocks will return to their historical norm, either by one security falling, the other one rising, or some combination of the two.

Pairs Trading Strategy: Market Neutral

Pairs trading is considered a “market-neutral” strategy. There are many of these strategies, which share a common aim to profit from both rising and falling security prices, while sidestepping the risks of the broader market.

Many hedge funds will employ market-neutral strategies, because they are paid based on their absolute returns. A common market-neutral trade may involve taking a 50% long and a 50% short position in one industry, sector or market. They usually do so to take advantage of pricing discrepancies within those areas. In addition to earning a return, their main goal is often to hedge out as much systematic risk as possible.

There are also market-neutral mutual funds, which can vary wildly in what they return investors, largely because there are so many market-neutral strategies, and ways to execute them. Interested investors may want to learn the fund’s particular approach to the strategy before jumping in.

How to Successfully Execute a Pairs Trade

For investors who are ready to incorporate pairs trading into their investment strategy, there are several steps they need to take in order to be successful.

Step One: Decide on Trading Criteria

The first step is to decide what securities to consider for the trade, and can be the most time-consuming in the entire process. This involves researching a vast array of possible investment pairs to find ones that have a historically high correlation coefficient but have since drifted apart. Then investors will want to build and test a model for those securities, using those results to arrive at the best possible buy-and-sell guidelines, as well as how long they intend to stay in a trade.

Step Two: Select Specific Securities

After the investor has settled on a process to select candidates for a pairs trade, it’s time to put that process into action and find securities that currently meet that criteria. Some investors may use manual research, while others prefer mathematical models. Regardless, investors need to think of how they want to use a pairs trade.

For investors who want to get in and out of a trade in a matter of hours or days, they’ll need to run their process to find possible trades on a regular basis. But investors whose trades will last for months won’t need to run their research as often.

Step Three: Execute the Trade

Once an investor has confirmed that a trade fits all their criteria, it’s time to execute the trade. With a pairs trade, there are small but important details to consider. For instance, most experienced pairs traders will execute the short side of the trade before making the long side.

Step Four: Manage the Trade

With the trade in place, the investor now has to wait and watch. This means sizing up the activity of the two securities in the trade to see if they’re approaching the criteria that would trigger one of the predetermined buy-and-sell rules. It also means watching the broader market, as well as any news that might have an impact on either security in the trade. Experienced traders will also constantly adjust the trade’s risk/return profile as markets shift and other news emerges.

Managing the trade is as important as setting it up. If a trader has a pairs trade they expect to last a month, but it reaches 50% of its profit objective in the first day after execution, what should they do? They may choose to close out of the trade that day, because the additional return isn’t worth the risk or the opportunity cost. But they also have other options. They might initiate a trailing stop loss level in the two positions as a way of locking in a portion of the profit. The decision isn’t easy, and may involve a host of other considerations.

Step Five: Close the Trade

The final step is to close the trade. But even this can come with questions and challenges, especially with trades that haven’t worked out, and whose predetermined durations are coming to an end. But it can also be the case with trades that have succeeded and are nearing their time limit. The urge to give a trade more time to turn around — or to do just a little better — has the potential to be the undoing of an otherwise successful trader.

That’s why experienced pairs traders often stress discipline as being as important as research, close monitoring and clear rules when it comes to earning consistent profits with the strategy.

History of Pairs Trading

Pairs trading is a somewhat higher-level trading strategy (though relatively simplistic at the same time), and it was actually first developed by technical analyst researchers at Morgan Stanley during the 1980s. Specifically, Nunzio Tartaglia led the charge, who ran the “quant” group at the firm.

It has since been adopted by traders and investors, big and small.

Investing With SoFi

Pairs trading is a trading strategy that involves the simultaneous purchase and sale of securities in anticipation of a price trend. The idea is that the two securities typically have shown a high historical correlation, but have fallen momentarily out of sync. The investor making the pairs trade is betting that the two stocks will return to their historical norm.

Pairs trading is merely one of many trading strategies, and like all others, it has its pros and cons. Prospective traders may benefit from a discussion with a financial professional before trying it out.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Is pairs trading still profitable?

Yes, pairs trading can be profitable, assuming a trader knows what they’re doing, and the risks involved with using the strategy. As always, there’s no guarantee that it will be profitable, however.

What are the risks of pairs trading?

Risks associated with a pairs trading strategy include the possibility of the trading model failing due to faulty assumptions on the part of a trader — that is, historical correlation between two stocks may not mean that the correlation has continued. Traders should also know that pairs trading involves fast movements, and that there’s a chance trades may not execute at the desired time.

How many pairs should a beginner trade?

It may be wise for a beginner to start with a single pair, until they get the gist or hang of the strategy.

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