Is that correct? According to the TreasuryDirect website, you can't redeem a bond within the first year. If a bond is less than 5 years old, you pay a 3 month interest penalty.
That is correct. It's twelve months instead of six. I was mistaken. Generally speaking an emergency fund should be 3-6 months of income. I justified the illiquid period by moving a third of my fund into it at a time.
The interest "penalty" is simply not getting back the interest accrued in the prior three months.