Pittsburgh and Savings Bonds
Monday, January 23rd, 2006
Categorized as: Savings Bond history
The long relationship between Pittsburgh and Savings Bonds was the topic of A special bond, by Thomas Olson, which ran in the business section of the Pittsburgh Tribune yesterday.
In the last few years the Federal Reserve System has consolidated its Savings Bond operations, which used to be distributed across the country, in Pittsburgh and Minneapolis.
The Federal Reserve is a separate agency from the U.S. Treasury, which actually issues Savings Bonds through its Bureau of Public Debt. However, the Federal Reserve, which has direct relationships with individual banks, has historically managed Savings Bond transactions.
The Pittsburgh office, which is a branch of the Cleveland Federal Reserve Bank, handles the eastern half of the country. The Minneapolis Federal Reserve Bank handles the western half.
In addition, Pittsburgh handles the printing and mailing of new paper Savings Bonds for the entire country. Olson interviewed officers of the Cleveland Federal Reserve to find out why that’s handled in Pittsburgh.
“We established a track record with the Treasury that allowed us to get the business,” said Raymond Brinkman, another vice president.
For instance, the Fed installed high-speed laser printers in 1994 which radically improved efficiency. They can churn out 8,000 bonds a minute – production that took 45 minutes with the previous printers.
In the mid-1990s, the Pittsburgh Fed spent $2.4 million to automate and modernize mailing functions. It bought machines that insert multiple bonds in one envelope and sort them by ZIP code. The machines paid for themselves within year one, saving roughly $3.2 million in postage and handling.
Moreover, Olson discovered, the Pittsburgh FRB branch has historically had a large presence in Savings Bonds. This was a result of Pittsburgh having the corporate headquarters of a relatively large number of major industrial corporations.
Before the days of 401K retirement plans, these companies encouraged their employees to invest in Savings Bonds through payroll savings plans. Traditionally, Olson learned from Stephen Meyerhardt, a spokesman for the U.S. Bureau of the Public Debt, most Savings Bond investments were made through payroll savings plans at old, industrial companies, the bulk of which are concentrated on the coasts and the upper Midwest.
Although over-the-counter bank transactions now exceed payroll savings plan investments, Pennsylvania is still one of the leading states for residents purchasing savings bonds, Meyerhardt told Olson.
Individuals who buy savings bonds tend to be between 40 and 60 years old, Meyerhardt added. They earn between $45,000 and $75,000 annually. A typical savings-bond buyer is just as likely to be female as male.
Unlike the Pittsburgh football team, which played its way into the Superbowl yesterday, Olson misplayed a few paragraphs and ended up contributing to the widespread misinformation about Savings Bonds.
People buy savings bonds at a discount to their face value. For instance, you might buy a $50 savings bond for $37.50. Then, after the bond matures, usually in 10 years, its owner would redeem it and receive $50.
The effective rate of return on the “EE” bond — which represents three-quarters of savings bonds issued — is currently 3.2 percent. The rate on “I” bonds, or inflation-adjusted bonds, is currently 6.73 percent.
Frequent readers here know that only paper EE bonds are sold at a discount to face value, that the discount is 50%, and that it takes 20 years for new EE bonds to reach face value.
“Maturity” is a confusing word that can mean either reach face value or stop paying interest, which are two entirely different things. I try to avoid the word.
Although EE bonds may make up three-quarters of the bonds outstanding, new investments in Savings Bonds are running about three-quarters Series I. The 3.2% rate Olson gives for EE bonds is only for new issues. Older EE bonds are mostly paying 4%, although there are a variety of rates depending on the bond’s issue date.
The rate on new Series I bonds is 6.73%, but only for six months. The rate changes every six months based on inflation. It can go as low as zero and has no upper limit.