Minimum holding period for savings bonds extended
By Laura Bruce • Bankrate.com

With money market and certificate of deposit rates so low, you might be tempted to stash some cash in savings bonds until short-term rates rise. After all, 4.66 percent for an I bond or 2.66 percent for the EE series or Patriot bond looks very good compared with 1.48 percent on a money market account or 1.68 percent for a one-year CD.

But unless you can invest in a savings bond for at least one year, forget about it. The government is extending the minimum holding period from six months to one year effective with bonds issued as of Feb. 1, 2003.

The minimum holding period is the length of time a bond must be held before it can be cashed.

"We haven't seen any big swings in sales of large denominations of savings bonds, but we did this, essentially, to remove the potential for abuse. The terms are there upfront. If you think you need the money before a year, go someplace else," says Pete Hollenbach, spokesman for the U.S. Treasury's Bureau of Public Debt.

Dan Pederson, president of BondHelp.com and author of Savings Bonds: When to Hold, When to Fold, and Everything In Between, says early redemption can be a costly problem for the government, especially in payroll purchase programs where redemptions may be frequent.

"Say it costs $1.50 to issue and redeem the bond. An employee buys a $100 bond for $50, so they're (the government) paying 3 percent of that $50 for you to get in and out of the bond in six months.

"The folks who are in and out, from my perspective, are the least desirable customers for the bond program -- not personally, but from an economic standpoint," says Pederson.

"It's the customers you can most live without because they're costing you money. It's like when banks set minimum balance levels; it hurts the small guy, but it's the least profitable customers they're trying to weed out."

Pederson says the three months' interest penalty imposed on redemptions of savings bonds held less than five years was the government's first effort to reduce turnover. That penalty, established in 1997, still stands.

Series EE, or Patriot bonds, can be purchased at financial institutions or at the Savings Bonds Direct Web site. They're offered in eight denominations ranging from $50 to $10,000 and are sold at one-half the face value. Interest is compounded semiannually.

The I bond is designed to protect your investment from inflation. The 4.66 percent interest rate is comprised of a fixed rate of return and an inflation rate that is adjusted semiannually. I bonds are purchased at face value and are sold in six denominations ranging from $50 to $5,000. Interest is compounded semiannually.

Earnings on both the I bond and the Patriot bond are exempt from state and local taxes.

For more information on these bonds, click here.

-- Updated: May 1, 2003