Sale of Savings Bonds Slides After Treasury Cuts Minimum Rate

AFTER more than a year of skyrocketing success, the United States government's savings bond program is suddenly watching its sales plummet - the result of low interest rates and the inability of many Americans to save much.

The US Treasury announced this week that sales of US savings bonds fell to $787 million in May. That follows sales of $2.5-billion worth of bonds in January; $2 billion in February; $1.5 billion in March; and $920 million in April. The May sales are also 14 percent below sales of $916 million in May 1992.

The reason for the downturn, financial experts say, is clear. The Treasury cut the minimum guaranteed interest rate on savings bonds from 6 to 4 percent, March 1. That took away the interest rate advantage savings bonds had held last year over many alternative investments such as passbook accounts, money market accounts, and bank certificates of deposit.

The US savings bond program posted its best year ever in 1992, selling $18-billion worth of these bonds. The only year in the 1980s when savings bonds even approached that level was 1986, when the Treasury sold $12 billion in savings bonds. During the early 1980s sales ranged from $3 billion to $4 billion annually. In the later 1980s they remained around $7 billion.

Savings bonds held for five years or longer now earn either the minimum 4-percent rate or the average of market-based rates for that period - whichever is greater. From May 1 to Oct. 31, the market-based rate is 4.78 percent. Bonds purchased before March 1 retain their earlier guaranteed minimum rates, until they mature and enter a new extended-maturity period.

"We wouldn't say that the savings bond program is in a slump," says Sheila Nelson, a Treasury spokeswoman. "Just through May alone, the Treasury sold over $7-billion worth of savings bonds, which is equal to most years in the late 1980s." Still, she concedes, "there has been a drop in sales." The Treasury will monitor that situation closely, she says.

The total value of US savings bonds held by Americans was $166 billion at the end of May, up from $144 billion in May 1992.

Apart from the decline in the guaranteed interest rate, some financial analysts say many Americans find it hard to save. That may be particularly true for wage earners in lower income brackets, who tend to be among the main purchasers of savings bonds, usually through company-sponsored payroll deduction plans. The Federal Reserve announced this week that consumer debt rose $2.3 billion in April, less than the $3-billion rise in March. April was the ninth straight month that consumer debt increased.

The modern savings bond program goes back to May 1, 1944, when President Franklin Delano Roosevelt bought the first Series E bond from then-Treasury Secretary Henry Morgenthau Jr.dd

The program was changed in the early 1980s, when the Series E bond was replaced by the Series EE bond. The Treasury also began a market-based interest rate system, guaranteeing a minimum rate or a market-based rate for bonds held five years, or longer, using whichever rate is higher.

Although savings bonds have frequently drawn the ire of financial planners because of their relatively low yields, they have enjoyed widespread popularity among millions of Americans who would not otherwise have a formal savings program.

"For many Americans, the savings bond program represents a form of forced savings that ensures the savings will be there when needed," says Donald Danko, editor of "Better Investing," a monthly investment magazine published by the National Association of Investors Corporation, in Royal Oak, Mich.

The reporting of interest can be deferred until the bonds are actually cashed. In most cases the bonds are exempt from state and local taxes on income and personal property. The savings bond program is thus a very "practical" program, Mr. Danko says. If people invest over a period of 10 or 20 years, they would be wise to purchase common stocks, either individually or through a mutual fund, Danko adds. Stocks tend to pay higher yields than other investments over the long term.