Investing For Your Future
Monthly IFYF Investment Message
May 2005
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Major changes were recently made to the way that Series EE U.S. savings bonds are marketed and the way that both Series EE and Series I bonds are sold directly to consumers. The online version of the Investing For Your Future home study course was updated to reflect these changes. U.S. savings bonds are discussed in both Unit 5 (Fixed-Income Investing) and Unit 8 (Investing With Small Dollar Amounts) of the Investing For Your Future course.
The first change made was that the federal government discontinued the sale of U.S. savings bonds through its EasySaver program effective March 31, 2005. EasySaver was an automatic savings bond purchase program that debited an investor's bank account on a predetermined schedule to make regular savings bonds purchases (e.g., $50 a month). All automatic EasySaver bank account debits were discontinued on March 31 and existing EasySaver accounts were automatically closed.
Instead of using the EasySaver program, investors who wish to purchase U.S. savings bonds on a regular basis are encouraged to open a Treasury Direct account. Like EasySaver, TreasuryDirect allows investors to make Series EE and I bond purchases by debiting their bank account. You buy, manage, and redeem your bonds online and no paper bonds are issued. Since TreasuryDirect offers some of the same features that EasySaver did, and more, the federal government decided to eliminate savings bond marketing program redundancies and discontinue EasySaver.
Further information about the TreasuryDirect program can be found at www.treasurydirect.gov. Questions about the transition from EasySaver to TreasuryDirect can also be sent via e-mail to bonds.easysav@rich.frb.gov. Previous EasySaver program investors must set up a Treasury Direct account to continue buying bonds on a regular time schedule (i.e., dollar-cost averaging). The information from EasySaver cannot be transferred from EasySaver to TreasuryDirect.
The second major change to U.S. savings bonds, effective May 1, 2005, affects only Series EE bonds. Inflation-adjusted Series I bonds are not affected. Instead of changing every six months to reflect current market interest rates, the interest rate on new Series EE bonds will be fixed for the life of the bond. Existing Series EE bonds purchased before May 1 will not be affected and will continue to earn interest based on 90% of the average market yield of five-year Treasury securities. Series EE bonds have used this variable interest rate method of crediting interest since 1982.
Interest rates on previously-issued U.S. savings bonds will continue to change every six months on May 1 and November 1. However, after May 1, 2005, investors who buy a new Series EE savings bond will receive the rate in effect at the time of purchase for the life of the bond. Interest on U.S. savings bonds can accrue federally tax-deferred (as well as state income tax-free) for as long as 30 years or until a bond is redeemed. Series EE bonds, as well as Series I bonds, must be held one year before being eligible for redemption. Redemptions made prior to five years from issue continue to be subject to a three-month interest penalty.
The reason for the change in savings bond interest rates is driven by current market conditions. In a rising interest-rate environment, fixing the rate of interest paid on Series EE bonds will save the federal government money and reduce the national debt.
