If 98 percent of all annual purchases of savings bonds by individuals are for $5,000 or less, why does the Treasury Department feel it necessary to reduce the amount of savings bonds purchased? The Treasury press release identifies a desire to get the program back to its roots of serving individuals with small amounts to invest. It's hard to argue with that. However, if 98 percent of the purchases already fit that pattern, why bother with the revised standards? One reason could be that Series EE savings bonds are required to double in value over 20 years. That means that a Series EE savings bond has to earn an average 3.5265 percent over the 20-year period. Currently, the Treasury pays 3 percent on Series EE savings bonds purchased between Nov. 1, 2007, and April 30, 2008. The difference in interest rates isn't paid out until required at the end of the 20-year original maturity of the bond. Redeem the bond before then and you only earn the 3 percent yield. While the Series I savings bond isn't required to double in yield over a 20-year original maturity, the inflation-indexed component of these bonds can make them an expensive form of financing for the U.S. Treasury. Series I bonds purchased between Nov. 1, 2007, and April 30, 2008, pay a fixed rate of 1.2 percent and an inflation component of 3.06 percent, for a yield of 4.28 percent. The inflation component adjusts every six months to reflect current inflation. When you compare what small savers can achieve with savings bonds, it makes investing in marketable Treasury securities a little less inviting. The graph below compares current marketable Treasury yields with current savings bond yields. That's not quite a fair comparison, since the Series I savings bond will see its yield change over time with changes in the inflation rate.  | | Yields: Treasuries vs. savings bonds | | |  |
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| Source: Yields sourced on Bloomberg.com |
The Series I should be compared to the Treasury inflation-protected securities, or TIPS. The 10-year TIPS bond is currently priced to yield 1.11 percent plus inflation, compared to the Series I bond's 1.2 percent plus inflation. On top of the yield advantage, the interest earnings for the Series I savings bond can be deferred until you redeem the bond, or final maturity, whichever comes first. The government is limited in what it can do in holding down the yield on savings bonds. The Series EEs have to double in value in 20 years, and while the fixed component on the Series I can be reduced, there's still the inflation component -- currently at 3.06 percent. So, it makes perfect sense for the Treasury Department to reduce the purchase limits on savings bonds. There's been some talk about the Treasury offering its marketable securities (bills, bonds and notes) in smaller denominations than the current minimum purchase of $1,000. That'll be a tough sell if the trusty savings bond yields more than most of the marketable securities and allows for tax deferral, too. |