Bonds To Earn Market-Based Interest Rates

U.S. savings bonds will earn market-based interest rates - with no guaranteed minimum yield - from purchase through maturity beginning May 1, the Treasury Department announced Monday.

Bonds held for five years or longer now earn a market-based interest rate, or a guaranteed minimum rate, whichever is higher. The guaranteed minimum currently is 4 percent.

But the Treasury is preparing to abandon the guaranteed minimum and announce two savings bond rates each May 1 and Nov. 1 so that bondholders know in advance what their securities are earning.

“For the first time, savings bond investors will get market-based rates right from the start,” Treasury Secretary Robert Rubin said in a statement. “Whether interest rates are high or low, savings bond investors will always get a return linked to market rates, a fair return on their money.”

The first rate will be the shortterm return that applies for the bond’s initial five years. The second is the long-term rate that applies after five years through maturity at 17 years.

The short-term rate will be 85 percent of the average of six-month Treasury security yields. The longterm rate is 85 percent of the average of five-year Treasury security yields.

Interest will be added to the value of the bonds at six-month intervals after purchase, thus insuring that the securities increase in value twice a year.

But because the market-based rate changes, it will be impossible to determine when the bonds will reach their face value.

For instance, a bond earning an average of 5 percent would reach face value in 14 1/2 years, while a bond earning an average of 6 percent would reach face value in 12 years. Bonds are purchased at half their face value.

However, bonds are guaranteed to double their purchase price after 17 years. Thus, if a bond does not reach face value after 17 years, the government will make a one-time adjustment to increase it to face value at that time.

After 17 years, bonds will continue to earn interest for a total of 30 years at the rate structure then in effect.

Bonds now reach maturity after 18 years.

Bonds bought before May 1 will continue to earn interest under the terms in effect at purchase.

The Treasury said there is about $180 billion in bonds outstanding, held by 60 million households.