Savings Bond Interest Rate Lowered, Sales Suspended

U.S. savings bonds will earn interest at a rate of 6.98% over the next six months, down from the 7.81% rate prevailing over the last six months, the Treasury Department said Wednesday.

However, the department had to suspend new sales indefinitely Wednesday because of congressional failure to enact legislation raising the federal debt limit.

“Without new legislation to increase the debt limit, the government lacks authority to issue any new debt obligations,” a Treasury statement said.

The government’s borrowing authority dropped at midnight Tuesday to $2.8 trillion from $2.87 trillion.

The House has voted to raise the debt ceiling to $3.1 trillion for the current fiscal year, but Senate legislation has been blocked by a squabble over whether to cut the capital gains tax.

When savings bonds go back on sale, those issued during the remainder of November will earn interest from the first of the month, the department said. Payroll savings plans will continue to operate normally, except that bonds that would have been issued during the current suspension will be issued when the suspension is lifted.

The new savings bond rate “reflects market activity during the past six months and keeps savings bonds in the mainstream of financial products for the coming semiannual rate period,” said Jerrold B. Speers, executive director of the Savings Bond Division.

Savings bonds’ interest rates are changed each May 1 and Nov. 1 to reflect open market rates. They are based on 85% of the yield on five-year Treasury securities, which have averaged 8.21% over the last six months.

Savings bond yields at redemption are the average of semiannual market-based rates during the time held, compounded semiannually, or a minimum rate, whichever is greater. The current minimum rate is 6%.

Since market rates for bonds were introduced, the rates have ranged from a high of 10.94% for the six months beginning in November, 1984, to a low of 5.84% for the six months beginning in May, 1987.

In addition to savings bonds, the department suspended the sale of special securities for state and local governments, the temporary investment vehicles for money those governments raise in the bond market.

If the securities are not available, state and local governments could be forced to cancel planned bond sales, leading to disruption of the municipal bond market.