Updated: May 3, 2013 12:14PM
Originally published: July 4, 2005
They’ve completely messed up U.S. Savings Bonds as an investment. For many years I used the July 4 holiday to write about an investment that was both patriotic and smart. But this year, I really have to cry “shame on you” to the Treasury department.
Just as the Federal Reserve has raised interest rates -- nine times in the past year -- Treasury has decreed that Series EE U.S. Savings Bonds will no longer carry floating interest rates that allow the return to keep up with the general level of interest rates.
Series EE bonds purchased before May 1, 2005, will continue to carry floating rates that adjust every six months, pegged to 90 percent of the rates for five-year Treasury notes
But that’s not the case for Series EE bonds purchased after May 1. Newly issued bonds will carry a fixed rate for the first 20 years you own the bond. Then there will be a 10-year extension during which the government can use its discretion in setting the rate.
While the rate on newly issued bonds will initially be set based on prevailing rates, it won’t adjust every six months. That means the current 3.5 percent rate on Series EE bond purchased between May 1 and Nov, 1, 2005 is fixed for at least 20 years.
It’s a sad day for small savers, those with just a few dollars a month to invest in bonds through payroll savings plans or $25 to give their grandchildren on birthdays. Series EE bonds were always the gift of choice, but now it’s time to change your savings bond habits.
Series I bond: the alternative
The government still offers one floating-rate alternative, the Series I (for Inflation) bonds.
Those bonds are bought at face value, and interest is added monthly to the bond’s value.
There are two components to this interest payment: a fixed “base rate” that is set at the time the bond is purchased, and a variable rate changed every six months based on consumer price inflation. The rate is changed in May and November.
The current rate on I-bonds is 4.80 percent through October. That rate is composed of a 1.2 percent base rate, plus a 3.58 percent inflation adjustment for the current period.
Of course, if inflation were to disappear, you’d be stuck with only the small, fixed base rate. But that doesn’t seem likely in the near future. And the current 6-month return of 3.5 percent compares favorably with Treasuries of like maturity.
Like Series EE bonds, interest paid on these I-bonds is exempt from state and local taxes. And you don’t pay federal income taxes on the interest until you cash them in. But if you cash them in before holding them for five years, you’ll pay a three-month interest penalty.
It’s time to take a look at your portfolio of U.S. Savings Bonds. You don’t want to cash in the EE bonds you currently own. They’ll still pay interest, with the promised six-month adjustments. But you might want to reconsider your payroll savings plan deductions, and switch from Series EE to Series I bonds.
You should also review the bonds you own -- or have given to your grandchildren -- to make sure they’re still paying interest. Most savings bonds continue accruing interest for 30 years from the original issue date, though some from 40 years ago are still gathering interest.
But time flies, and if you still have old Series E bonds issued before 1975 sitting in their safe deposit boxes, it’s time to check them out and cash them in if they’re no longer collecting interest.
Those “matured” bonds can no longer be exchanged tax-deferred into Series HH bonds. Those who currently hold HH bonds receive taxable, semi-annual interest checks. But the government did away with that exchange privilege on Sept. 1, 2004.
If you want to figure out the value of your currently held savings bonds, go to www.TreasuryDirect.gov and search for the program called the “Savings Bond Wizard,” which you can download to track your bond portfolio on you own computer. Or you can use the online calculator.
Paper to electronic bonds
This government Web site also has a feature to convert your paper bonds back into electronic securities, which are more easily tracked. And you can click on “Treasury Hunt” to see if your bonds have stopped earning interest.
An estimated $191 billion in U.S. Savings Bonds are outstanding and paying interest, and an additional $13.28 billion worth of bonds on which interest is no longer being paid. All those little savings bonds do add up. And that’s The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.