New 2 1/2 - year 'small saver' vehicle catching on

Some officials of Bell Federal Savings, based in Chicago, were startled by the initial public reception of Bell Federal's new 30- month "small saver" savings certificates.

What's happening, says Helen McCormack, a Bell spokeswoman, is that a number of savers are actually "buying $10,000 two- and-one-half-year certificates" instead of the higher-yielding six-month $10,000 money- market certificates, as would have been expected.

Sales of the new 2 1/2-year certificates, which made their debut at many financial institutions Jan. 2 in denominations as low as $100, are selling "quite well," she says.

Bell Federal's experience may not be untypical.

Overall statistics are not yet available from around the United States on the new savings certificates -- designed by federal banking regulators to stem disintermediation from thrift institutions as savers seek higher interest rates elsewhere, such as in money-market mutual funds.

But what does seem clear is that there is solid initial public support of the new certificates. This is in sharp contrast to the indifference and rejection accorded the four-year savings certificate offered during the past year. It was also designed to benefit the "small saver," who usually does not have the funds to buy a $10,000 six-month certificate.

The new 2 1/2-year certificates, like the six-month $10,000 money-market certificate, is linked to the interest rate earned on US Treasury securities of the same maturity period.

In effect, it provides a way for individuals with particularly small savings to earn the same type of "high yield" interest payments garnered by more affluent persons riding the six-month money-market tide.

By law, the interest rate for 2 1/2-year certificates at thrift institutions (savings and loan associations and mutual savings banks) is pegged at one-half percent below the rate of US Treasury issues.

For commercial banks, the rate is 3/4 of 1 percent lower.

For the month of January, 1980, the interest rate at thrift institutions on the 2 1/2 year certificates is 10.40 percent, with an effective annual yield of 11.12 to 11.15 percent, depending on compounding methods.

At commercial banks, the rate is 10.15 percent, resulting in an annual yield of around 10.87 percent at most institutions.

By contrast, the new six-month $10,000 money-market certificate of both thrift and commercial institutions (which currently pay the same rates) is earning an 11.88 percent rate, with an effective yield of around 12.45 percent.

It is precisely because of this "double digit" closeness of the rates of the 2 1/2-year certificates and the six-month certificates -- 10.40 and 11.88, respectively -- that some savers are now socking away amounts as large as $10, 000 into the 2 1/2-year issues.

Rates on the six-month CDs are expected to drop later in the year as overall interest rates (presumably) begin to drop.

Thus, many savers argue that locking in their dollars at the highest possible rate now for the longest period is the soundest savings policy.

"The new 2 1/2-year certificates are selling very well," says Robert J. McCarthy Jr., president of Metropolitan Federal Savings & Loan Association, headquartered in Bethesda, Md.

The new certificates are believed coming at a particularly advantageous time for many thrift institutions.

Some thrifts are starting to offer special incentives raising the effective rates on conventional savings accounts, which are fanning competition among thrifts.

At John Hanson Savings & Loan Association, in the Maryland suburbs of Washington, for example, passbook accounts can now earn 7 percent through payment of a special "V.B.R." -- 1 percent "variable-bonus rate" -- that is expected to be declared by the institution's board of directors before each quarter. The regular passbook rate, without the special payout, is 6 percent.

But that means that if interest rates were in fact to drop somewhat, many smaller savers -- who do not like their money tied up for protracted periods of time -- will seriously consider leaning to high-paying passbook accounts.

That in turn could spell some serious disintermediation problems among competitive thrift institutions.

Minimum deposit requirements for the new 2 1/2 year certificates vary sharply. At Chicago's Bell Federal, for example, there is no minimum deposit. At Metropolitan Federal, in Bethesda, the minimum is $100.

At most commercial banks, meanwhile (which prefer to sell the six-month $10, 000 CD rather than the 2 1/2-year issue), the minimum is around $500.

In some regions of the US, financial institutions are not yet offering the new certificate, but are expected to do so as they catch on elsewhere.