Just as interest rates are beginning to rise, the federal government has changed the rules on its popular Series EE savings bonds, making...
NEW YORK — Just as interest rates are beginning to rise, the federal government has changed the rules on its popular Series EE savings bonds, making them less attractive to small savers.
Starting today, EE bonds will be sold with a fixed interest rate for the 20-year life of the bond. For the past decade, the rate on these bonds was adjusted every six months, in May and November, so as rates rose, bond owners were rewarded with higher returns.
The government also is changing the way it determines the interest rate on EE bonds. The rate on outstanding EE bonds, now 3.25 percent, is tied to the yield on the five-year Treasury securities. The rate on bonds sold after May 1 will be closer to the yield on 10-year Treasury securities.
The Treasury Department, which manages the government’s debt, emphasized in its announcement that the new rules apply only to bonds purchased in the future; the owners of outstanding EE bonds will continue to benefit from biannual adjustments.
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Savings experts note that consumers often choose bonds as gifts or for long-term goals, such as funding college, because they’re safe and the money grows tax-deferred. Still, these savers may want to rethink their investing strategies, perhaps looking at alternative products such as the Series I savings bonds as well as other investments, they say.
Daniel Pederson, president of the Savings Bond Informer, a bond consulting service based in Detroit, said he understands why the government made the change but worries that it will discourage savers from even considering EE bonds.
“They want to borrow money at the lowest possible rates, but they have to make their product attractive enough so it draws investors,” Pederson said.
“In this case, it appears they’re making the decision on the side of borrowing at lower rates.”
An alternative to the EE bond is the I bond.
“If it were my money, I’d switch to I bonds until we see how this [change in the EE] sorts out,” said Jack Quinn, chief executive officer of Savingsbonds.com, a bond consultancy in Spring Lake Heights, N.J.
The I bond has a base rate of 1 percent and an inflation component, tied to the government’s consumer-price index, that’s adjusted every six months.
Quinn noted that the I bond has been increasingly popular with small savers in recent years.
Greg McBride, a financial analyst with Bankrate.com in North Palm Beach, Fla., said savers may want to consider looking for alternatives to savings bonds.
He noted that five-year certificates of deposit, available at banks and thrifts, now are yielding an average of 3.8 percent. Another possibility are high-yielding money-market deposit accounts at online banks. Some, McBride said, were yielding 3.3 percent.
“There, you’re in a position that when interest rates rise, your yield increases,” he said. “And you can get to the money any time you want, without penalty.”