Billions In Bonds Earn No Interest Rates Not Guaranteed For Life

Owners of $2 billion in U.S. Savings Bonds receive no interest at all on their investments. Equally disturbing, they probably don’t realize it.

Many are unsophisticated investors, having purchased the bonds through payroll deduction plans. Many could use the money, but savings bonds, unlike other investments, issue no statements.

These people could, and should, check on their investments, but even when provided with information they might find it difficult to understand.

Many thousands believe their investments are at a guaranteed rate for the life of the bonds. They aren’t. Usually, the rate drops. No interest at all is paid on bonds purchased before October 1956.

Surprises are imminent also for tens of thousands of bondholders who bought at this time of year in 1986 in order to assure themselves of a 7.5 percent rate of return before a drop to 6 percent.

Now, a decade later, these beneficiaries of a guaranteed 7.5 percent rate, will find themselves earning a guaranteed rate of just 4 percent. That’s because savings bond guarantees are for 10 or 12 or 18 years - not for life.

These 1986 buyers represent an important segment of the 55 million owners of savings bonds because the biggest surge in purchases occurred in late October of that year.

That was when Dan Pederson was Savings Bond Division supervisor at a branch of the Federal Reserve Bank. “I knew,” he said, “that many of the people who inquired about rates just didn’t understand.”

Suppose, for example, that a couple saving for retirement bought $10,000 of Series EE bonds in October 1986, believing the 7.5 percent rate, a rate that more than doubles money in 10 years, was good for the life of the bonds.

At that rate, their bonds would be worth $91,051 in 30 years. But how wrong could they be?

After 10 years, their 7.5 percent became a guaranteed minimum 4 percent. Even if they earned more than the lowered guarantee because of market factors, they’d probably miss their goal by many, many thousands of dollars.

The confusion was lessened in 1995, when newly issued bonds were offered at one rate, good for six months, after which the rate is adjusted to the prevailing six-month Treasury yield. And adjusted again in six months.

Nonetheless, 95 percent of the outstanding bonds are bound by a confusing formula that involves both guaranteed and market-based rates.

Pederson quit the Fed to set up a business - The Savings Bond Informer Inc. - that would attempt to explain the unexplained. The Detroit-based company offers two products for individuals.

The first, “U.S. Savings Bonds: A Comprehensive Guide,” is available in bookstores or from the company at $24.95 a copy (800 927-1901); the second is a customized report on individual holdings.

Fees range from $12 for reports on one to 10 bonds to a high of $69 for 300 to 500 bonds.