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U.S. SAVINGS BONDS become a better deal for short-term investors after May 1, but those who want to hold for the long-term will earn less money.

That's the assessment of savings bonds experts who have analyzed the long-awaited changes in the savings bond program that were announced Monday by the Treasury Department.

Under the new system, bonds purchased after May 1 and held for more than five years will be credited with lower interest rates during the first five years than they are now, says Dan Pederson, who runs The Savings Bond Informer Inc. in Detroit (800-927-1901).

"A long-term holder might not be as well off since what you earn in the early years is important to your return because of the effects of compounding," he says.

The changes affect Series EE bonds purchased after April 30; bonds purchased prior to that date continue under the current system, with one exception noted below. Also, Series H and HH bonds, which are obtained by exchanging Series E or EE bonds, retain their currently unattractive 4 percent fixed interest rate.

As expected, the Treasury removed the 4 percent guaranteed minimum interest rate for bonds held less than five years. Surprisingly, it retained the 4 percent minimum for long-term holders by guaranteeing that bonds will reach their face value in 17 years.

Because the price of a new bond is half its face value -- a $50 face value bond sells for $25, for example -- it takes an annual yield of 4 percent in order for the original investment to double in 17 years.

So if the Treasury's variable rate system has not automatically increased a bond to its face value in 17 years, the Treasury will make a one-time extra payment to the bond, increasing the yield to 4 percent.

Anyone who bought a bond after April 30 and held it for less than 17 years would not get that guaranteed 4 percent.

The end of the minimum guaranteed rate does have one effect on bonds currently owned by Americans -- some $180 billion is outstanding, making it one of the most widely held investments.

Under the current system, bonds issued before May 1 are guaranteed a 4 percent minimum rate for 17 years; after that time, a new minimum rate should take effect.

Since the Treasury won't be declaring new minimum rates anymore, the 4 percent guarantee will last until the bond finally stops earning interest 30 years after it was issued, says Peter Hollenbach, a spokesman for the Bureau of the Public Debt.

Under the new system, bonds issued after April 30 will be paid interest based on recent average yields of six-month Treasury bills for the first five years. The Treasury will set the rate twice a year -- in May and November -- at 85 percent of the average yield on T-bills for the previous three months.

Each individual bond will earn at that rate for six months, then switch to the new rate declared most recently.

For example, suppose the new rate is set at 5 percent in May and you purchase a bond in July. Your bond earns interest for the first six months at the 5 percent annual rate. In November a new rate is set: 6 percent. Once your bond hits its six-month anniversary, in January, you start earning at 6 percent.

Based on current 6-month T-bill yields, the initial rate on short-term savings bonds would be about 5.4 percent if it were set today. Assuming short-term T-bill rates don't decline dramatically in the next few years, they will offer short-term savings bond investors a better deal than the current 4 percent minimum.

Another important change affects bonds held less than five years. Currently, interest is credited to a bond monthly for the first five years. Under the new system, it will be credited on each six- and 12-month anniversary. If you sell a bond at 11 months rather than 12, for instance, you will lose out on five months worth of interest.

After a bond is held for five years, the current system takes effect: Bonds are credited with interest every six months, and the rates are derived by taking 85 percent of the average rate on five-year Treasury Notes.

That's where the new system hurts bonds bought after April 1. Under the current system, if you hold a bond longer than five years, you are credited with the five-year Treasury note rates, applied retroactively to the day you purchased the bond.

Under the new system, you get six-month T-bill rates for the first five years, and then begin getting five-year note rates, but only for years six, seven and so on.

Five-year note rates are generally higher than six-month T-bill rates -- except for rare periods such as the late 1970s, when short-term rates exceeded longer term rates.

Under the current savings bond system, those who hold their bonds for long periods of time get longer-term rates applied for the entire life of the bonds.

Starting in May, buyers of bonds will get short-term rates for five years and longer-term rates only after that.

For that reason, Pederson says bond investors who plan to hold for a long period of time should buy their bonds before May 1. Those who plan to hold for less than five years should wait until then to make their purchases.

Also, the change to a full market-rate system makes it more important to keep track of the values of your bonds, he says.

"Bond owners have to move away from the mentality of tucking them away in a dresser drawer for 10 years," he says.

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