FROM THE OFFICE OF PUBLIC AFFAIRS

I am pleased to announce a number of steps we are taking to make savings bonds more attractive investments forAmerican savers.

As you know, the rates on savings bonds arecalculated every six months based on market rates on outstandingTreasury securities. Starting tomorrow, those calculations willbe done differently in three important ways.

First, the market rates on which the savings bondrate are calculated will be long-term rates, rather than thecurrent combination of a short-term and a long-term rate.

Second, the percentage of market rates that willbe paid on savings bonds will increase from 85 percent to 90percent.

Third, interest on savings bonds will accruemonthly, instead of every six months. This will eliminate theproblem of an investor losing up to five months interest byredeeming a savings bond at the wrong time. To encourage longerterm holdings of savings bonds, however, there will be a threemonth interest penalty if a savings bond is redeemed within thefirst five years of its issuance.

These changes will make savings bonds moreattractive and competitive. For decades, savings bonds havehelped make the American dream a reality for millions of families-- helping to pay for everything from housing to education toretirement. About one in four Americans now owns a savings bond.That’s good but we can -- and should -- do better.

Improving the savings bonds program is part of amuch broader effort by the Clinton Administration to encouragegreater savings. For the nation, more savings means moreinvestment and greater productivity. For families, thattranslates into higher wages and greater opportunity.

Our savings rate is far too low in this country.The rate is equivalent to 4.2 percent of

GDP, the lowest by far of the G-7 countries, andlower than many developing countries. Increasing that rate hasbeen a high priority for President Clinton. We have taken foursteps to turn that priority into reality.

First, we have instituted pension reforms to makepensions portable for workers and simplify the pension laws forbusinesses. Knowing that you can take your retirement benefitswith you if you change jobs helps workers go where their skillsand talent dictate.

Second, we have proposed a number of measures toexpand access to Individual Retirement Accounts. TheAdministration’s proposals are designed to improve currentincentives for saving in general, and retirement saving inparticular, and to improve the effectiveness of IRAs, whilesignificantly expanding IRA eligibility.

Third, we introduced new inflation indexed notesearlier this year. Our first two sales of this landmark securityhave been great successes. Next year, we will expand this effortby introducing the first inflation-indexed savings bond.

Fourth, we are using technology in an effort tomake information about the savings bond program more available toall Americans. We established a home page on the World Wide Weblast spring where would-be investors are able to download theSavings Bond Wizard, a simple program that lets investors keeptrack of their bond holdings. Later this year, we will takeanother step to make savings bonds more available by introducingcredit card purchasing on line.

The Treasury Department is committed tocontinuing to build on these measures. As we do so, we will raisethe savings rate, which will, in turn, promote a strongernational economy, and improve the economic prospects of middleclass families around the country. On Monday, we announced thatwe expect to issue $65 billion less in debt during thisApril-June quarter than will mature. This will be a recordpaydown, and is largely the result of higher than expected taxreceipts this month. It demonstrates the health of the economy,and the continuing benefits of the President’s deficitreduction program of 1993. I think this announcement demonstratesthat we have been responsible and conservative in our budgetforecasting and suggests that the deficit could be down for thefifth year in a row.

Now, I would like to turn this over to RogerAnderson from Treasury who will continue with the quarterlyrefunding announcements and he will answer your specificquestions.

FACTS ABOUT HIGHER RATES

FOR NEW SERIES EE SAVINGSBONDS

HIGHER RATES FOR NEW SERIES EE BONDS

Series EE savings bonds purchased on or after May1, 1997, will earn interest based on market yields for 5-yearTreasury securities right from the start. The new rate for EEbonds will be 90% of the average yields on 5-year Treasurysecurities for the preceding six months.

MONTHLY INTEREST

Now, new Series EE bonds will increase in valueevery month. The announced interest rate is compoundedsemiannually.

BONDS CASHED BEFORE 5 YEARS

Bonds cashed before 5 years are subject to a3-month interest penalty. For example, if you cash a bond after18 months you will get 15 months’ worth of interest. Thesavings bond program encourages Americans to save for longer-termgoals such as education or retirement. This rewards longer-termbond holders who then benefit from higher 5-year rates over thefull life of the bond.

EASY TO UNDERSTAND

The rates announced each May and November are theannual rates that apply to bonds for that six month earningperiod. For example, the 6-month earning period for a bond issuedin May is from May through October; for a bond issued in June,it’s June through November.

INTEREST EARNING LIFE

Series EE bonds earn interest for 30 years. Thislong life lets investors use savings bonds for truly long termgoals like education and retirement.

TAX ADVANTAGES

Interest earned on your Series EE bonds is exemptfrom State and local income taxes. You can defer Federal incometax until you redeem the bonds or they stop earning interestafter 30 years. This means you can plan ahead and choose whenmight be the best time to realize income for tax purposes. And,since your interest isn’t taxed until you redeem a bond yoursavings grow faster.

There are also special tax benefits available foreducation savings. If you qualify, you can exclude all or part ofthe interest earned on Series EE bonds from income when the bondsare redeemed to pay for post-secondary tuition and fees.

FACE VALUE/DENOMINATION

Series EE Bonds are sold at half their face valueand are available in denominations ranging from $50 through$10,000. Because EE bond interest is pegged to market rates thatchange every six months, there is no way to predict when a bondwill reach its face value. In the unlikely event that rates areso low that a bond doesn’t reach face value by the time itis 17 years old, Treasury will make a one-time adjustment toincrease the bond’s value to face value at that time.

LIQUIDITY

You can cash Series EE bonds any time after 6months. Most investors plan to hold bonds for longer term goals,yet they know they can get their money with interest if they needit. Of course, if a bond is redeemed before five years, a 3-monthinterest penalty applies.

BONDS ISSUED BEFORE MAY 1, 1997

Savings bonds and notes issued before May 1,1997, are not affected by these changes and continue toearn interest under the terms in effect before May 1, 1997.

QUESTIONS AND ANSWERS

ABOUT HIGHER RATES FOR NEWSERIES EE BONDS

 

Q Is Treasury issuing a new series of savings bonds?

A. No. Treasury is making the familiar Series EE savings bond a more attractive way to save by moving to a higher rate and by increasing bond values every month instead of semiannually.

Q. Why is Treasury changing the way Series EE bonds earn interest?

A. This is the latest in a series of changes to Series EE bonds that will make them a more attractive way for Americans to save for the future.

Q. When will the new rates for savings bonds take effect?

A. The new way of setting rates for Series EE savings bonds takes effect for bonds issued on or after May 1, 1997.

Q. How will interest get added to savings bonds after May 1, 1997?

A. New EE bonds will increase in value every month. The bond’s interest rate is compounded semiannually. The rate that Treasury announces each May and November will be applied to a bond for the 6-month earning period.

Q. How will Treasury set the new rate?

A. Savings bonds will earn the new higher rates right from the start. The rate is 90 percent of the average 5-year Treasury market yields for the preceding six months. Treasury will announce a savings bond rate each May 1 and November 1. The rates announced each May and November are the annual rates that apply to bonds for that six month earning period. For example, the six month earning period for a bond issued in May is from May through October; for a bond issued in June, it’s June through November. The rate that’s announced is the rate bonds will earn during the 6-month earning period.

Q. If I cash a bond during the first five years, how is the penalty figured?

A. If you cash a bond before it is five years old, you give up the last three months worth of interest. For example, if you buy a bond in May 1997 and cash it 24 months later in May 1999, you get your original investment back plus 21 months of interest. The value of the bond would be based on the announced rates applied over the 21 month period from May 1997 through February 1999.

Q. How safe is my investment?

A. Your principal and interest are backed by the full faith and credit of the United States. This means that you will always get back your original investment and the interest it has earned when it comes time to redeem your bond.

Q. How long will my bonds earn interest?

A. Series EE bonds will earn the interest for 30 years.

Q. Can I be sure my bond will reach face value?

A. Yes. Series EE bonds are purchased at half their face value or denomination. Because EE bond interest is pegged to market rates that change every six months, there is no way to predict when a bond will reach its face value. For example, a bond earning an average of 5% would reach face value in 14½ years while a bond earning an average of 6% would reach face value in 12 years. In the unlikely event that rates are so low that a bond doesn’t reach face value by the time it is 17 years old, Treasury will make a one-time adjustment to increase the bond’s value to face value at that time.

Q. What happens to the Series EE and E savings bonds I already own?

A. Nothing. Outstanding Series EE and E bonds as well as savings notes issued before May 1, 1997, are not affected by these changes. They will continue to earn interest under the terms in effect before May 1, 1997.

Q. Are there any changes to Series HH or H bonds?

A. No. Series HH bonds remain unchanged. Series HH/H bonds issued or entering an extended maturity period on or after March 1993 will pay interest at a level rate of 4%.