Treasury to Fix Rate on EE Bonds

The U.S. Treasury said Monday that it would end a program that assured buyers of Series EE savings bonds an automatic earnings boost in times of rising market interest rates.

The change is a sign that the government expects rates to keep climbing -- as they have for the last year -- and is seeking to save taxpayers money at the expense of savings bond buyers, some analysts say.

Series EE bonds are popular with people of limited means because they can be purchased for as little as $25. Since 1982, the bonds have earned either a guaranteed minimum rate or a rate that floated with the market, adjusted every six months.

The Treasury said Monday that, starting May 1, newly issued Series EE bonds would pay a fixed rate for their 20-to-30-year term.

The change won’t affect EE bonds sold before May 1.

The floating-rate program stood to benefit the Treasury over the last two decades because interest rates have mostly fallen in that period.

But interest earned on the bonds has been rising since last year, when the Federal Reserve began tightening credit by lifting short-term market rates. More recently, concerns about inflation pressures from stubbornly high oil prices have driven longer-term rates higher.

The government said its decision stemmed from a regular review of the bond program. The Treasury “concluded that the pricing model needed a change,” said Brookly McLaughlin, a spokeswoman in Washington. She declined to comment on whether the move was aimed at lowering interest costs.

But several analysts said the only good reason to shift to a fixed rate from a floating rate would be if the government assumed that interest rates in general were headed higher for an extended period.

“Clearly, they’re trying to lock in advantageous financing rates,” said Bill Hornbarger, a fixed-income securities strategist at brokerage A.G. Edwards & Sons in St. Louis.

“This sounds like somebody at the Treasury walked into a meeting and said, ‘I’ve got a great idea for saving money,’ ” said Daniel Pederson, Detroit-based author of the book “Savings Bonds: When to Hold, When to Fold and Everything in Between.”

Still, changing the program might save a relative pittance compared with the government’s overall borrowing costs. The Treasury sold a total of $3.1 billion in Series EE savings bonds in the fiscal year ended Sept. 30. By contrast, the government borrowed a net $364 billion via conventional T-bills and notes in calendar 2004.

Initially, investors might earn more on the new Series EE savings bonds than on the old floating-rate bonds: The Treasury said the fixed rate on bonds sold starting May 1 would be tied to the 10-year T-note yield, which was 4.46% on Monday.

Outstanding Series EE bonds, which total about $130 billion, will continue to earn a floating rate that is adjusted every six months and tied to yields on five-year T-notes, which were at 4.12% on Monday.

The current annualized rate on outstanding EE bonds is 3.25% for bonds sold since May 1997. That rate was set on Nov. 1 and will change again on May 1.

Savings bonds offer some advantages over bank savings accounts, including the option to defer taxes until maturity.

The risk for savers in locking in a fixed rate on new savings bonds or other longer-term securities is that market interest rates could soar in coming years, leaving them stuck with an inferior return.

But it’s also possible that interest rates could slide anew, which could mean that a locked-in rate would be a boon for savers taking a chance on new bonds.

Another savings bond option is the Treasury’s Series I bond, which pays a relatively low fixed rate (currently 1%) but also offers protection against rising inflation: Every six months the bond’s value is adjusted to compensate for the change in the U.S. consumer price index.

The Series I bond terms weren’t affected by the Series EE bond change, the Treasury said.