Q: I just read that Series HH savings bonds are being discontinued at the end of the year. Meanwhile, their interest rate has dropped to 1.5 percent. There was no warning, and owners like myself who dutifully purchased EE bonds all these years to convert to HH when retiring are now left holding the bag. Also, the penalty for converting bonds less than five years old is not being waived should one decide to go ahead and purchase HH bonds at 1.5 percent. What does someone like me do with these bonds? I would have thought the US Treasury would have given a warning so that we could have made the exchange before they pulled the rug out from under us.
A.C.H., Ft. Riley, Kansas
A: The US Treasury is indeed scuttling HH bonds, though it gave some advance notice of its plans. Pete Hollenbach, a spokesman for the Bureau of Public Debt, says the government announced its intention in May to quit offering HH Bonds sometime in mid-2004 (an exact date has not yet been set). And as of Jan. 1, the government dropped the interest rate from 4 percent to 1.5 percent to "better align the effective return on savings bonds with marketable security yields," Mr. Hollenbach says.
You're right that the penalty (three months of interest) still applies should you cash in or convert a Series EE bond before it's five years old. But there's nothing that says you have to make such a conversion.
Bonds that you converted to the HH series prior to this year will continue to earn 4 percent for the first 10 years of their life. For the second 10 years, they'll earn the current rate, which now is 1.5 percent.
An HH Bond cannot be purchased, but obtained only by trading in an EE bond. Unlike other bonds that accumulate interest and pay it out when you cash them in, HH bonds pay semiannual dividends.
If you're still willing to do business with the Treasury, you might cash in those HH bonds and buy either Series I Bonds or TIPS - Treasury Inflation-Protected Securities. Both have the same state and local tax-exemption features as savings bonds, and carry some protection against inflation. Of course, cashing in bonds could trigger a tax liability.
For more information, log onto the Bureau's website at www.publicdebt.treas.gov.