Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, January 1, 1995 TAG: 9501040031
SECTION: BUSINESS PAGE: D-4 EDITION: METRO
SOURCE: SANDRA BLOCK KNIGHT-RIDDER NEWSPAPERS
DATELINE: LENGTH: Medium
Starting sometime this year, one of those sure things will disappear.
The global trade agreement adopted by Congress in December contained a little-noticed provision that repeals a law requiring the government to pay at least 4 percent interest per year on Series EE savings bonds. By mid-1995, the Treasury Department is expected to replace the guaranteed rate with one that is pegged to the average interest rate on six-month Treasury bills.
What does this mean to you?
The change won't affect bonds you already own. You will continue to receive a minimum of 4 percent interest on those bonds (6 percent if you bought them before March 1993). Nor will it affect any savings bonds purchased between now and next spring, when Treasury is expected to announce the change.
But if you buy a new savings bond after the rule change and hold it for less than five years, you probably won't be able to count on a guaranteed return of 4 percent. Instead, you'll earn interest equal to 85 percent of the average rate on six-month Treasury bills.
That may not be a bad deal. At current interest rates, a savings bond that pays 85 percent of the average rate on a six-month Treasury bill would yield between 5 and 5.5 percent a year, said Daniel Pederson, founder of the Savings Bond Informer, an advisory service for bondholders. ``That's much better than the guaranteed rate of 4 percent,'' he said.
But interest rates can change. If the average rate on Treasury bills drops to 3.5 percent, for example, the interest rate on a savings bond held for less than five years will fall to 3 percent. Such rates certainly aren't unprecedented: Earlier this year, six-month T-bills were yielding only about 3.1 percent.
If you buy a savings bond and hold it for more than five years, you probably won't be affected much by the change. That's because after five years, EE bonds pay annual interest equal to 85 percent of the rate on five-year Treasury notes or 4 percent, whichever is higher. Since the average rate on five-year notes rarely falls below 4 percent, eliminating the minimum rate won't matter much to long-term savers, Pederson said.
The government is also planning to change the way interest is credited on EE bonds. Now, interest accrues monthly during the first five years, then switches to twice a year. The government wants to start crediting interest on all savings bonds semiannually. That means if you buy a savings bond in mid-1995 and redeem it during the fifth month of a six-month period, you will lose five months' worth of interest.
Why is the government changing rules for savings bonds?
Back when interest rates on Treasury bills were less than 4 percent, some people used savings bonds as temporary havens for their money, much in the same way that investors use money market mutual funds. That didn't sit well with Treasury officials, who say savings bonds are supposed to encourage long-term saving, not short-term arbitrage.
``What we're looking to do is reorient savings bonds back to where they should be: something that encourages small investors to save over a long period of time,'' said Peter Hollenbach, a spokesman for the U.S. Bureau of Public Debt.
Nonetheless, the changes probably won't sit well with savers, many of whom still haven't forgiven the government for reducing the minimum interest rate to 4 percent. Sales of EE bonds have declined steadily since March, when the 4 percent guarantee became effective.
Jack Jacobs of Akron said he had planned to buy more savings bonds but is now reconsidering that decision.
``The young families that are saving these bonds for the college education of their children are getting hammered,'' Jacobs said. ``It's an underhanded way of keeping money for Uncle Sam.''
by CNB