When you redeem a U.S. Savings Bond for cash at your local bank, it impacts the money supply metrics known as M1 and M2 in specific ways.
M1 includes the most liquid forms of money, such as cash, demand deposits, and other checkable deposits. At the moment you redeem your bond and receive cash, you are converting a less liquid asset (the bond) into a liquid form (cash). This transaction initially increases the amount of currency in circulation, thereby increasing M1.
On the other hand, M2 encompasses M1 along with near-money assets like savings accounts, time deposits, and other forms of money that are easily convertible to cash but are not as liquid as M1 components. When you redeem the bond, the cash you receive is part of M1, but it does not change the overall amount in M2 because the bond was already included in the broader money supply previously as a form of non-liquid asset. So, while cash in M1 increases directly with redemption, M2 remains unchanged in total value, but its composition shifts slightly from less liquid to more liquid assets.
In summary, redeeming a U.S. Savings Bond increases M1 due to the influx of cash into circulation and does not change M2’s total supply, just its components.