Savings Bond Alert #011
Monday, April 4th, 2005
Categorized as: Savings Bond Alerts
Treasury enhances Savings Bond product line – Series EE Savings Bonds to have fixed rates
The Treasury announced today that beginning May 1, new Series EE Savings Bonds will earn a fixed rate of interest.
In making the change, the Treasury has drawn a clear distinction between its Series I and Series EE Savings Bond product lines. Previously, interest rates for the two product lines were set using methods that, while distinctly different, came up with about the same rate. Now new Series EE bonds will earn fixed rates, while Series I bonds will continue to earn rates that are adjusted every six months.
Since their inception in January 1980, a primary feature of Series EE Savings Bonds has been that their rate adjusts every six months. The formula used to make this adjustment has changed over the years – currently it’s 90% of the average five-year Treasury yield.
A feature known as guaranteed rates, which was discontinued in May 1995, has tended to hide the semiannual adjustment feature from owners of older Savings Bonds. Most of the Savings Bonds issued in those high-rate years earn their fixed guaranteed rate rather than the changing market rate.
After May 1, rates for new Series EE Savings Bonds will not be set by a formula, but will be set “administratively.” The Treasury says the rate will be based on 10-year Treasury note yields and adjusted for features unique to Savings Bonds, such as the tax deferral feature and the option to redeem the Savings Bonds at any time after the initial holding period.
The change to fixed rates takes away the primary competitive advantage of Series EE Savings Bonds when market rates are low. On the other hand, when interest rates are high the new fixed-rate feature will allow the public to lock in high rates with Savings Bonds for 30 years, which hasn’t been possible before.
In adjusting to this change, investors should remember that Series I bonds have been the better choice when rates are low, as they are now, anyhow.
The change gives Savings Bonds two very different products – one, Series I, preferable when rates are low and the other, Series EE, preferable when rates are high.
This is an improvement over the current situation, where there isn’t a great deal of difference between the rates paid by new Series I and Series EE bonds.
The change applies only to new Savings Bonds issued after May 1. If you want to run out and buy Series EE bonds before the rule changes, you can do so, but in today’s low-rate environment, Series I bonds are your better choice.