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The Bond Teller - May Brings Rate and Other Changes to the Savings Bonds Program

The first few days of May brought a number of announcements important to U. S. Savings Bonds issuing and redemption agents. These included the usual rate changes effective on May 1, as well as an enhancement to the TreasuryDirect electronic system and a long-term look at the future of paper savings bonds.

First the rates. Bonds issued for the six month period beginning May 1, 2003, will earn the following interest rates for their first semiannual interest period: EE Bonds, 2.66%; I Bonds, 4.66%. In the case of Series I Bonds, the fixed-rate portion of the composite interest rate will be 1.1% for bonds issued in this semiannual period, down from the previous 1.6%. But because the rate of inflation increased during the past six months, the overall semiannual rate increased from the 4.08% effective for new issues from November 2002 through April 2003. Purchasers of I Bonds should be aware that the fixed rate set at time of purchase is effective throughout a bond's 30-year life, and is added to the inflation rate (as measured by the consumer price index for urban consumers) to determine the composite rate.

Additional announcements affecting the program came on May 5. On that date, the TreasuryDirect electronic system added EE Bonds to the I Bonds that have been available since the system t was launched on October 15, 2002. TreasuryDirect permits individuals opening accounts over the Internet to purchase, manage, and redeem bonds via electronic funds transfers, 24 hours a day, 7 days a week. TreasuryDirect accounts link to a customer-designated checking or savings account at a financial institution permitting debits and credits.

Long-range plans, announced at the same time, are to move toward the issuance of all savings bonds through TreasuryDirect, eventually eliminating the issuance of paper securities. No date for ending paper issues has yet been set.

Also announced May 5 is a change to the original maturity period for EE Bonds. Beginning with issues on and after June 1, 2003, paper EE Bonds will be guaranteed to reach face value (initial maturity) after 20 years, rather than the 17-year original maturity that has been in effect since March 1993.

Electronic EE Bonds, issued through TreasuryDirect, will double in value in no more than 20 years from date of purchase. All savings bonds issued through the TreasuryDirect system are non-denominated - that is, they are issued in penny increments above $25, and earn interest for up to 30 years.

Under the market-based rate system that applies to EE Bonds, EE's earn 90 percent of the average return on five-year Treasury marketable securities for up to 30 years from issue date. If the market-based rates are not sufficient to have a bond double in value after 20 years, the Treasury will provide a one-time payment at that time to make up the difference. Older bonds are not affected by this change in original maturity.