Uncle Sam Still Sells Savings Bonds, And Many Find Them a Good Deal

United States savings bonds are one of the world's most popular financial vehicles. More than 55 million Americans have a savings bond - or many of them - tucked away somewhere. But sales are down slightly, running at an annual pace of about $6.4 billion this year, according to one nongovernment bond expert. That compares with sales near $7 billion in 1995 and $9 billion in 1994.

Experts believe the decline stems from a number of factors, especially the drop in interest rates paid by the US Treasury in recent years. In March 1993, the Treasury lowered the "guaranteed" rate on savings bonds from 6 percent to 4 percent. Then, in May 1995 it scuttled the guaranteed 4 percent rate and shifted to a market-based rate structure, calculated as a percentage of rates on US Treasury securities.

"The [sales] decline has been running around 10 percent a year recently," which reflects lower yields for short-term securities, including savings bonds, says Daniel Pederson, a financial consultant specializing in savings bonds (see chart). Other financial products, such as mutual funds, have been competing successfully for investors' money.

By contrast, when sales reached a whopping $18 billion in 1992, interest rates then prevailing on the bonds were unusually high.

Moreover, savings bonds - long known for their simplicity - have become more complicated with the rate changes. While savings bonds have always been unique financial instruments - in that each bond had a separate story based on its particular duration and interest-rate pattern - bonds are now highly individualized. "You just about have to have a course in accounting to figure out what each of these new bonds will be worth when you cash them in," one financial specialist says with a laugh.

"The [US] Treasury is probably trying to figure out where the floor is" in terms of declining sales, another expert says.

Still, about 7 million Americans continue to buy Series EE bonds through monthly payroll deductions. For the first quarter of 1996, sales of EE bonds totaled about $1.6 billion.

Rates are changed twice a year, on May 1 and November 1. For current Series EE bonds, issued between May 1 and Oct. 31, 1996, the bonds yield 4.36 percent for the first five years, which is 85 percent of what the average of six-month Treasury security yields for February through April 1996. The yield on the bonds after five years, until maturity at 17 years, is currently 4.85 percent, which is 85 percent of the average of five-year Treasury security yields for November 1995 through April 1996. (To check current rates, call 800-US BONDS.)

Why buy savings bonds, given their complexity? According to Treasury spokesman Peter Hollenbach, the bonds not only provide competitive market-based interest rates but are safe, being backed by the full faith and credit of the US Treasury. They are free from state and local taxes, and federal taxes are deferred on earned interest until the bonds are redeemed. Typically, many older savers do not cash in their bonds until they retire and are being taxed at a lower rate.

Savings bonds can also be purchased for as little as $25 for a $50 bond. (Savings bonds are discount, or zero-coupon, bonds, in which you do not earn regular interest income. Instead, your interest comes to you when you redeem the bond: The "face value," which you get on redemption, is higher than the sales price you pay to buy the bond.) In his book "The Only Investment Guide You Will Ever Need," (Harcourt Brace), personal-finance guru Andrew Tobias calls savings bonds one of the few worthwhile financial programs left for the small saver. What bank, he asks, will let you save $25 a month without a maintenance fee?

Mr. Pederson agrees. Savings bonds are especially valuable for small savers or for very conservative investors who are uncomfortable with the stock market, he says. Savings bonds outperform most bank savings accounts and short-term bank certificates of deposit, he notes. He also finds them competitive with money-market accounts, which are not typically federally guaranteed, as are the bonds.

They also can be used to provide tax-sheltered earnings for a qualified college education.

Still, Pederson, a former Federal Reserve employee specializing in savings bonds, finds the bonds to be complicated instruments. To request the book he has written, "US Savings Bonds: A Comprehensive Guide for Bond Owners and Financial Professionals," call 800-927-1901.

"Savings bonds are a 'do-it-yourself' investment," he says, where you have to find out how your bonds will perform. "For example, some $2.6 billion worth of [older] bonds are currently not earning any interest. They are just sitting in bank vaults or in drawers. If bondholders knew they were not earning interest they would probably cash them in and reposition the money."

Pederson says bondholders should evaluate their bonds every one to three years. If you are cashing in some of your bonds, he says be sure you liquidate the "poorest performers."