With interest rates rising, the staid 30-year EE U.S. Savings Bond has been an appealing option for investors who want to ride rates up and keep their money absolutely safe.

But the government played a dirty trick last week: It announced that starting May 2, EE bonds will no longer adjust every six months to match prevailing rates. When you buy one, its yield will be fixed for 20 years. At that point, the government will determine the rate for the final 10 years.

The government will guarantee that, at a minimum, an EE bond investment will double in value over 20 years. But that works out to about 3.5 percent a year, which is pretty stingy.

So if the floating-rate feature suits you, best hurry: EEs bought through April 29 will still adjust every six months. The current annual rate for the first six months is 3.25 percent, and they will then adjust every six months to equal 90 percent of the yield on the five-year U.S. Treasury note.

Also, consider inflation-protected I bonds, currently paying 3.67 percent. More about that in a moment.

Rates released May 2

The government won’t announce rates on the new, fixed-rate EEs until May 2, but it’s likely to be around 4 percent since it will be guided by yields on 10-year U.S. Treasury bonds. Old-style EEs could well move above that in the next year or two.

New EE rates will be set every May 1 and Nov. 1, but new rates will affect only those bonds sold on or after those dates.

What’s behind the change? Saving money. By fixing the EE rate, the government will avoid paying more later if rates rise, as many experts expect. Nothing would stop it from returning to adjustable rates some day – if rates are likely to come down, for example.

Despite the change, the new EE bonds will be attractive to many investors, as they will be immune from the “interest-rate risk” that causes most other types of bonds to lose value when prevailing rates rise. That can be a big problem if you want to sell a government or corporate bond before it matures – you might get far less than you’d paid. With a savings bond, the government guarantees you will always get back what you paid, plus interest earned.

Only 12-month wait

You can redeem any type of savings bond as early as 12 months after buying it, though you’d give up three months’ interest earnings if you haven’t yet owned it for at least five years.

So consider this: Suppose you can buy an EE bond May 2 or later and it yields 4 percent a year. If next year’s new EEs offer 5 percent, you could sell the older one and use the proceeds to buy a new one.

You’d lose three months’ interest, leaving you with 3 percent earned over 12 months instead of 4. But that’s about what you’d get today if you bought a one-year certificate of deposit from a bank, so you wouldn’t really have lost anything. And if prevailing rates fall, you’ll still get that 4 percent for at least 20 years.

As I mentioned, the other option is inflation-protected I bonds, which will continue to adjust every six months. Their current 3.67 percent yield is composed of a 1 percent rate fixed for the bond’s life, and a 2.67 percent inflation adjustment. The inflation portion goes up or down every six months to mirror changes in the Consumer Price Index, so the rates might be higher on I bonds offered May 2.

Savings bonds can be purchased at many banks, or directly from the government at www.treasurydirect.gov.

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(Jeff Brown is a business columnist for The Philadelphia Inquirer. E-mail him at brownjphillynews.com.)

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(c) 2005, The Philadelphia Inquirer.

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