NEW YORK -- The U.S. Treasury just announced a new interest-rate structure for Series EE savings bonds. The new yields will be better for buyers who will hold their bonds less than five years. For longer-term holders, it all depends. You could earn a bit less than the older bonds paid, depending on how interest rates do.
The change takes effect May 1. Starting then, the rates on all newly issued EE bonds will be linked to market rates. EE bonds held for less than five years will earn 85 percent of the average six-month Treasury bill yield. Bonds held five years or more will earn 85 percent of the average five-year Treasury-note yield.
New rates will be announced every May 1 and Nov. 1. If those changes were in effect today, short-term rates for EE bonds would be about 5.3 percent and long-term rates would be about 6 percent.
All older EE bonds and bonds bought between now and May 1 will continue to operate under the old rules. You're currently earning 4 percent on EE bonds held for less than five years. If you plan a new short-term purchase, wait until May 1 and buy your bonds then at higher rates, advises Daniel Pederson, president of the Savings Bond Informer in Detroit.
If you're a long-term holder of EE bonds, you're already earning 85 percent of the five-year Treasury yield. That's now 5.92 percent and probably will rise on May 1.
But older bonds have a different and more complicated system of crediting interest that consumers find difficult to understand. Under the new rules, your most recent earnings simply will be added to your EE bonds every six months, figured from your purchase month.
Savings bonds will still sell for half their face value. You pay $50 to buy a $100 bond. But you can't predict when your $50 investment will be worth $100. That depends on what happens to interest rates.
The Treasury sets an "original maturity date" for EE bonds, which is many years away. Some buyers think they're required to hold their bonds until then, but that's not so. After a six-month holding period, you can cash in the EE bond whenever you want, without penalty.
One big difference in the new system is the guarantee. Today's EE bonds will never earn less than 4 percent during their original maturity period, no matter what happens to interest rates. Some older bonds have guarantees as high as 7.5 percent.
The new bonds, however, generally offer no guarantee, except in one instance. The government promises that your bonds will double in value after 17 years at the most. If your $50 bond isn't worth $100 by that time, extra money will be added to the bond to bring it up to its face value. That gives you an effective minimum yield of 4.1 percent. You don't get that guarantee, however, if you sell before 17 years are up.
In Pederson's view, it will be unusual to have to use the guarantee. Although short-term rates have dipped below ...X...XTC percent in the recent past, long-term EE-bond rates usually exceed that amount, he says.
Incidentally, no change has been made in Series HH bonds. They're still paying a fixed 4 percent.
It's not easy to get good information on savings bonds. Many people ask their banks. But bank employees often don't know what EE-bond rates are or when the interest on a particular bond accrues. That's important to know. You lose six months' interest if you cash in a bond just before its accrual date.
Last year, Pederson's organization called 400 banks in 10 states, asking five basic questions about savings bonds. The answers were wrong 42 percent of the time, he says.
The government publishes free information. For tables on when EE-bond interest accrues and on minimum rate guarantees, send a postcard to the Bureau of Public Debt, Savings Bond Operations Office, Parkersburg, W.Va., 26106. You can also get a fact sheet on the new bond interest rates.
For comprehensive information about savings bonds, get Pederson's useful book "U.S. Savings Bonds." The new edition, containing the new rates, will be out in May, at $24.95. If you order before May 1, you'll be charged $19.95. Call Pederson at (800) 927-1901.
Jane Bryant Quinn is a syndicated columnist. Write to her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y., 10022.