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Losing Interest In EE Savings Bonds

By Albert B. Crenshaw
Sunday, April 17, 2005; Page F04

Perhaps drawing a lesson from homeowners who have refinanced to lock in today's low interest rates, the Treasury Department has announced it is going to begin locking in current rates on buyers of new Series EE U.S. Savings Bonds.

EE bonds have long been popular with gift-givers, because they can be purchased for as little as $25, and with older savers, because they are exempt from state and local income taxes, and federal taxes are deferred until the bonds mature.

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But the Treasury Department has slowly been eliminating many of the bonds' most attractive features.

For example, last September the department barred holders of Series E and EE bonds from rolling them over into Series HH bonds. That strategy had allowed holders to continue deferring taxes on the interest earned by the E/EE bonds, though the additional interest paid on the HH bonds is taxable annually. Further, H and HH bonds can no longer be rolled over at maturity, but must be cashed and taxes paid.

The latest change, effective May 1, while simplifying Series EE bonds, makes them considerably less appealing in the current low-interest-rate climate.

Under current rules, which will continue in effect for bonds issued before May 1, EE bonds issued since the late 1990s carry "market" interest rates equal to 90 percent of the average yield for five-year Treasury securities for the preceding six months. They adjust every six months.

The rates on these bonds are low now -- 3.25 percent -- but if market rates rise significantly holders will see their rates rise as well.

(The Treasury Department changed the interest rate structure of savings bonds several times in the 1980s and '90s, so older ones follow different rules.)

Rates on EE bonds issued May 1 or later will be fixed administratively by the Treasury Department, based on 10-year Treasury note yields but, as the department said, "adjusted" -- presumably downward -- "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."

A new interest rate will be announced every May 1 and Nov. 1, and bonds issued between those adjustments will carry that rate for at least 20 years.

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