Expect a Big Drop in Savings Bond Rates

If you are among the 55 million Americans who own U.S. savings bonds, you should know that rates change Wednesday, and they’re likely to drop significantly, says Daniel J. Pedersen, author of “U.S. Savings Bonds: A Comprehensive Guide for Bond Owners and Financial Professionals.”

However, if you buy the bonds before the end of October, you might get a deal--the old 5.25% rate locked in for six months, Pedersen notes.

Although the U.S. Treasury, which sets savings bond rates, will not reveal the new rate before the change is made, Pedersen estimates that the short-term rate is likely to drop to 4.6% from the current 5.25%. Long-term rates--those paid on bonds held for five years or more--are likely to drop to 5.3% from 6.31%, he adds.

If you buy a bond today or Tuesday and use “immediately available funds”--i.e., a check drawn on a local account--your bond can be issued in October at the October rate. If your check is not drawn on a local bank, the bank may decline to process the application until the check clears. That could push your purchase date into November and cost you some bucks in interest.

How can you know if the November rate will be lower? According to rules that went into effect earlier this year, savings bond rates are set at 85% of the average yield on six-month Treasury bills. Because those are now paying about 5.3%--and have been for a couple months--the new savings bond rate is bound to land in the range of 4.5% to 4.7%, experts say.

You must hold savings bonds for at least six months to get any interest, however. Under the new rules, the bonds only accrue interest twice annually. If you hold on to the bond, the interest you get during the next six-month period will drop to the rate announced Wednesday.

Why buy a savings bond when you could buy a somewhat higher-yielding six-month Treasury bill? Money. Normally, you must invest at least $10,000 to buy short-term Treasuries, but you can buy savings bonds with as little as $25.