US Savings Bonds are no longer a laughingstock

Sometimes the best ideas come from the most unexpected places. Take the US Treasury Department, for instance. For several years, its US Savings Bonds were the laughingstock of people who wanted competitive interest rates for their savings.

But last year, the Treasury started to peg savings bonds to a market-based interest rate and to give savers a way to earn competitive interest rates for as little as $25. Right now, the rate is over 11 percent.

The nest-egg-building public seems to like the idea. For the fourth consecutive month, the Treasury Department reports, January sales of its savings bonds were higher than the same month in the previous year. In January, sales reached $344 million, up from $272 million last year. Redemptions totalled $730 million, down 26 percent. In all, more than $68 billion worth of savings bonds were in the public's hands at the end of January, more than half a billion dollars more than a year ago.

What the Treasury did to make savings bonds such a good deal was to use an average of marketable five-year Treasury securities. From now on, savings bonds held at least five years will pay 85 percent of that rate. The rate is adjusted every six months throughout the five-year period. The current rate is effective through April 30. So while it is not known what rate you will get five years from now on a savings bond you buy today, you can know that from now until April 30, it will earn an annual rate of 11.09 percent. Try to find a money-market fund paying that kind of yield.

You may be able to find a bank or savings and loan paying that rate on one of its new money-market deposit or Super NOW accounts. But it won't be guaranteed for six months, and you'll have to put in at least $2,500. You can buy the smallest savings bond for exactly 1 percent of that, or $25. The denomination, or face value, is actually $50 - and this is what you would get at maturity in 10 years, assuming a minimum 7.5 percent yield. There are also bonds with face values of $75, $100, $200, $500, $1,000, $5,000, and $10,000. Again, these are purchased at half of face value.

There is also a minimum rate, which the bonds won't go under, even if the five-year Treasury average drops dramatically. That rate is 7.5 percent for savings bonds held five years or more. So, with this minimum and the Treasury average, a person buying savings bonds can be fairly certain of a return that at least matches - and probably is above - the inflation rate. The new rate even applies to old Series E Bonds purchased after October 1947, so you do not have to cash in your old bonds to buy the new ones.

New bonds can be purchased at most commercial banks and financial institutions, and many employers have payroll-deduction plans. That is one part of the savings-bond program that is not new. Neither is their safety. They are guaranteed by the United States government, and they will be replaced by the Treasury if they are lost, stolen, or destroyed.

Interest earned on Series EE Bonds is free of state and local income taxes, and federal tax may be deferred until the bonds are cashed or reach final maturity.

Series EE Bonds are not the only ones showing improvement. Series HH Bonds pay a flat rate of 7.5 percent. Series HH Bonds are income bonds, meaning they pay interest by check semiannually. You cannot buy Series HH Bonds with cash as you can with Series EE, but you can exchange Series EE or E for Series HH. Full faith and credit

I have seen articles on buying Treasury bills and securities from other US government agencies where the terms ''full faith and credit'' and ''direct obligation'' were used. Could you explain the distinction between-these terms? B. D.

The easiest explanation is that both are safe. Compared to many private investments, full faith and credit and direct obligation give you strong assurance that the money you invest is safe. Of all the debt instruments the government issues, those backed by its full faith and credit are considered the most secure. A direct obligation means the government is directly indebted to you, much as you would be directly obligated to a bank if you took out a loan. In addition to savings bonds, direct obligation and full faith and credit applies to Treasury bills and notes.

Other US agencies, like the Federal Farm Credit and the Government National Mortgage Association, also issue debt securities. But unlike those that come from the Treasury, these carry an ''implied guarantee'' backed by that agency and the US government's ''moral'' obligation to back it up. So far, this obligation has always been met, but many people still prefer the stronger assurance of full faith and credit.

If you would like a question considered for publication in this column, please send it to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass. 02115. No personal replies can be given by mail or phone. References to investments are not an endorsement or recommendation by this newspaper.