Every time interest rates drop on certificates of deposit, those homely old U.S. savings bonds look a little better to people who hold them -- even glamorous to investors who are rolling over CDs and don't need the interest for income.
Protected by a floor of 6 percent during the 12 years it takes them mature, the Series E savings bonds are expected to be hot items again this year. People who bought savings bonds in the mid-1980s when the floor was at 7.5 percent are looking even smarter these days as interest rates withdraw from historic highs.
As more snazzy and streamlined investment vehicles enter the competition, the plain-vanilla Series E bonds hang in there with conservative investors who are interested more in the return of their money than the return on their money.
Even after the savings bonds reach their face value maturity, they continue to earn market-based interest rates, with taxes deferred until the bonds are cashed. Savings bonds are rare investments that can be held for up to 60 years -- with income taxes deferred. To attain that longevity, bond buyers must convert the Series E bonds to Series H bonds at the end of 40 years.
There are a few catches, of course, but no big ones. To earn the 6 percent floor guarantee, bonds must be held for five years. Even if they are cashed before the end of five years, they still pay 4.16 percent, which is comparable to most current CD rates.
Martin Marietta Corp. Chairman Norman Augustine, national volunteer chairman of the U.S. Savings Bond Campaign, has established a sales goal of $10 billion this year -- up from $9.1 billion last year. Michael D. McKinney, area director of the savings bond division of the Treasury Department said that, based on sales of $1.3 billion in January alone, the $10 billion goal is "attainable" despite the recession and the high unemployment it has created.
One reason the goal is usually met is that so many large employers, including Martin Marietta, make savings bonds available through painless payroll deductions and encourage employees to buy them.
Other big selling points are that savings bonds provide investors with uncomplicated co-ownership strategies for leaving money to heirs -- or helping to pay for the college education of children or grandchildren. Brochures on savings bonds are available at most banks and seem like elementary school primers when compared with the lengthy and sometimes convoluted prospectuses that go with many investment packages these days.
According to Mr. McKinney, payroll deductions account for about 40 percent of the annual sales -- with over-the-counter bank purchases making up the rest.
If you call your bank and learn that they do not have savings bonds in stock, don't fear that you have been shut out for 1992. The Treasury is changing to a "regional delivery system" that is slightly different from the old system in which bond purchasers walked into the bank with cash and left with a savings bond.
Under the new system, bond buyers will fill out an application, the bank will send it to the regional Federal Reserve Bank, and the bank will send the bonds to the purchaser or the benefactor -- all without loss of any days in interest. When bonds are sold as a gift, the purchaser will be issued a gift certificate notifying him or her that the bond is on the way. The bonds will still be about as close as you can come to legal tender -- redeemable at any bank.
Although there is a purchase price limit of $15,000 per person, per year, the Treasury is very liberal in allowing bond buyers to bend the rules. By using family members as co-owners, investors can run annual purchases significantly higher.
The government, of course, has a vested interest in allowing this practice. With the rate for 30-year Treasury bonds at 7.85 percent, savings bonds are still a relatively cheap way for the government to borrow money. And considering the mess we are in, that benefits all of us.