Savings Bonds and Treasury Securities
Thursday, February 2nd, 2006
Categorized as: Savings Bonds and competitive investments • Series I US Savings Bonds • TIPS
Why does the U.S. Treasury finance part of the national debt with Savings Bonds rather than with Treasury notes and bonds that are much cheaper? T-bonds with a maturity of 5/15/30 are trading with a yield of about 4.7% this morning while the rate on I Bonds is 6.73%.
If you compare apples to apples – Series EE bonds to T-notes and Series I bonds to TIPS, you’ll find that the Savings Bonds actually pay less than marketable Treasury securities.
The T-bond rate you quote is best compared with the current EE Savings Bond rate of 3.20% – a discount of 1.5 percentage points.
As for I bond rates, right now 10-year TIPS have a base rate of over 2% while I bonds have a base rate of 1%. Both receive the exact same inflation boost on top of that.
With I bonds, the inflation is added to the interest rate, so it’s big and obvious. With TIPS, inflation is used to adjust the principal, so nobody notices.
Savings Bonds have other differences from marketable Treasury securities that make them attractive to individual investors, including:
- protection from the risk of capital loss when interest rates rise
- much lower investment levels
On the other hand, paper Savings Bonds cost the Treasury more in support costs than marketable securities, which is why they have lower rates.
However, as more and more Savings Bond investors turn to TreasuryDirect, there will be less of a reason for the Treasury to offer Savings Bond holders the smaller carrot.