Savings Bonds troubling Treasury
By John M. Berry
Washington Post
WASHINGTON — The venerable U.S. Savings Bond, a Christmas stocking stuffer for grandchildren for more than 60 years, has recently become a hot item. Investors looking for a risk-free way to earn more than the 1.2 percent available on three- and six-month Treasury bills — and more than what bank certificates of deposit are paying — have leapt on the bonds for short-term savings. Some savings bonds are yielding as much as 4.08 percent.
Recently the Treasury Department, pointing out that the bonds "are designed to be a long-term savings vehicle," doubled the minimum holding period to one year, effective with bonds sold in February.
But that's only one of the challenges facing Treasury and its Bureau of the Public Debt in running the program that has put the familiar pieces of paper in the hands of about 55 million people. Operating the program is so expensive relative to the amount of money raised that some members of Congress have questioned whether the government should continue to sell the bonds. And the department's appropriation bill for this year, which is pending in the House, would eliminate $22.4 million requested by the Bush administration to cover advertising and other marketing costs in the current fiscal year.
Treasury officials readily acknowledge that the savings-bond program is expensive to administer. But they want to continue it for investors who seek a secure investment but may have only the minimum $25 to buy a single bond, or a few hundred dollars, but not the $1,000 minimum for a Treasury bill or note. The Treasury's goal, one official said, is to reduce the program's cost by eliminating the sale of paper bonds — now available through about 40,000 financial institutions — and going entirely electronic.
Within a few weeks, Treasury plans to make it easier to buy bonds using the Internet.
The cost problem is this: The vast majority of U.S. Savings Bond owners, many of whom are children who received them as gifts, hold only a few bonds, and in small denominations. Collectively the bonds represent only about $190 billion, or 3 percent, of the $3.4 trillion worth of government debt owned by the public.
Aside from being suddenly popular with savvy investors searching for higher short-term yields, savings bonds remain very popular with small investors. That popularity is enhanced by the fact that they can be bought from Treasury Online using a credit card, which has added to the "churning" of the bonds, because some of the cards give the purchasers frequent-flier miles to boot.
But the bonds themselves are attractive. A Series EE bond, which is sold at 50 percent of its face value in denominations ranging from $50 to $10,000, increases in value each month according to an interest rate equal to 90 percent of the six-month average of five-year Treasury notes. It currently yields 3.25 percent.
The Series I bond, issued in the same denominations, is purchased at face value and pays an interest rate that is a combination of a fixed rate and a semiannual inflation rate tied to the consumer price index. This is the bond currently yielding 4.08 percent. Furthermore, a bondholder can defer federal income taxes on the bonds' appreciation until they are redeemed or they mature. The interest is exempt from state and local income taxes.
