Treasury Pushes Savings Bonds Despite Low Rates

Monday, 26 Mar 2012 06:53 PM

 

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The U.S. Treasury will unveil a new savings bonds website on Tuesday in an attempt to win consumers over to traditional government-issued, small-denomination bonds, despite their low interest rates.

Currently, Series EE bonds are paying a fixed rate of 0.60 percent. I bonds -- which have variable rates including an inflation component that tracks the Consumer Price Index -- are currently paying 3.06 percent interest, but that rate changes every six months and will next be adjusted on May 1, 2012.

Both types of savings bonds must be held for a year, and holders give up some interest if they trade in their bonds before five years pass.

"We think they are good products ... and the interest rates are competitive," Bureau of the Public Debt Commissioner Van Zeck told Reuters.

The new promotional website, tagged Ready.Save.Grow" (http://www.treasurydirect.gov/readysavegrow), is aimed at helping small savers and investors learn how to use Treasury Direct (http://www.treasurydirect.gov), the shopping portal through which individuals can buy Treasury bonds, notes and bills online. The Treasury stopped issuing paper savings bonds on Jan. 1, but Zeck pointed out that people who want to buy bonds as gifts can print out a paper gift receipt to slip into a greeting card.

The Treasury sold $1.7 billion in savings bonds in fiscal year 2011, and about 87 percent of them were old-fashioned paper bonds, according to the figures from the department. Investors who want to buy what's called "marketable" Treasury securities -- more sophisticated bills, notes, bonds and Treasury Inflation Protected Securities (TIPS) -- can also use the site to get user-friendly directions on how to buy these products.

To promote savings bonds to consumers, the Treasury has partnered with several private groups, including: AARP; the Consumer Federation; the American Savings Education Council, a public/private pro-savings group; and the Center for Financial Services Innovation, a largely bank-funded nonprofit that aims to address financial services needs of low-income "unbanked" consumers.

But even small savers may be turned off by the low interest rates on EE and I bonds. Some online banks offer higher rates on savings that do not require minimum balances, holding periods or fees; the ING Direct Orange Savings Account is currently paying an interest rate of 0.8 percent, for example.

"The bottom line is the Treasury needs cash, and the best way to raise it is to sell bonds," said Thomas Duffy, a Red Bank, New Jersey, financial adviser who is skeptical about the advantages of savings bonds in most situations. "There's not a lot of upside."

I bonds do offer some advantages, though. They're backed by the U.S. government, so they are considered to be among the safest of investments. And because the interest earned on savings bonds can be completely tax-free if used to pay for college, they are a useful savings vehicle for families whose children are in their early teen years.

That is because the child has to be young enough to fulfill the hold-for-five-years rule, but also not so young that a riskier investment -- in stocks for example -- wouldn't be a more promising alternative. "If you have a short time period, the I bonds are perfect, but if you have 18 years to save, you get a huge upside by being more aggressive," Duffy said.

"The trouble is, we have so many people who remember when savings bonds were a great deal," he said. "But I can't tell you how long ago that was."

© 2014 Thomson/Reuters. All rights reserved.

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