Sales plummet with interest rate Confusing variables, lower returns blamed

Savings bonds

January 16, 1996|By Bill Atkinson | Bill Atkinson,SUN STAFF

Americans' love affair with U.S. Savings Bonds is on the rocks.

Sales of savings bonds by the federal government have been falling at roughly a 25 percent annual clip since 1992, when consumers bought a record $17.7 billion in savings bonds, said Daniel J. Pederson, president of a Detroit-based financial advice firm and author of the book "U.S. Savings Bonds."

The government sold $7.2 billion in savings bonds during its 1995 fiscal year ended Sept. 30, down from about $10 billion the prior year.

"One of the Treasury Department's main concerns is,'Where is the bottom here?' " said Mr. Pederson, head of Savings Bond Informer Inc. "They are hoping that this year is the bottom, and bonds can bounce back."

Mr. Pederson worries that there could be more erosion in the savings bond numbers. In the early and mid-1980s, the government issued bonds that paid a guaranteed rate of 7.5 percent for the first 10 years. Those bonds are now reaching maturity and assuming a much lower guaranteed rate of 4 percent, which could prompt investors to cash them in and seek higher returns elsewhere.

What's more, last May the government eliminated any minimum guaranteed rate on newly issued bonds in favor of a variable rate that is tied to government securities. The rate changes semiannually. EE bonds held for less than five years earn 85 percent of the average six-month Treasury bill yield. Bonds held five years or more earn 85 percent of the average five-year Treasury note yield.

The current rate, set Nov. 1, is 4.75 percent for short-term Series EE bonds through April 1. The rate for long-term Series EE bonds is 5.16 percent.

In addition, as more Americans have begun investing in stocks and mutual funds, savings bonds are competing with many different investments that earn higher returns.

L. Edward O'Hara, a certified financial planner and president of Silver Spring-based Capital Asset Management Services Inc., recommends stocks and Treasury bills and notes over savings bonds.

"I think there are other things investors can invest in," he said. "There are so many variables out there."

Mr. O'Hara doesn't recommend savings bonds because they are so confusing.

"There is some value to savings bonds, but most people don't understand how they work," he said. "We just don't know the rules, and we don't know when they change" interest rates.

Mr. Pederson said he runs into hundreds of people who don't know what rate their bonds are paying. Some people rely on co-workers and bank tellers who often don't have the facts. That's why Americans hold more than $2 billion in U.S. Savings Bonds that have stopped earning interest.

Bond Tables

Redemption values and interest rates for Series E U.S. Savings Bonds 11C

Redemption values and interest rates for Series EE U.S. Savings Bonds 11-13C

Redemption values and interest rates for U.S. Savings Notes 14C

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