Savings Bond Rate Cut Causes Buying Frenzy

The Treasury Department on Friday reduced the 7.5% guaranteed rate for U.S. savings bonds to 6%, effective today, sparking a massive nationwide buying spree marked by long lines of investors eager to lock in the old rate.

The rate reduction, which had been expected for several months, “reflects the decline in market interest rates during the past year” and will remain in effect “until such time as market conditions again may require a change in the current minimum rate,” the Treasury said in its announcement.

The cut in the guaranteed rate, which applies to Series EE savings bonds held five years or longer, is expected to slow a recent boom in sales of the bonds. But, because bonds sold Friday still carried the 7.5% guaranteed minimum rate, banks, savings and loan associations and Federal Reserve banks from New York to Los Angeles were braced for--and got--a buying frenzy.

Some banks reported customers buying as much as $60,000 worth of bonds--the maximum allowed under law per year (each individual is allowed $30,000 for himself and another $30,000 owned jointly with a spouse or child).

“Banks were calling saying they were sold out of bonds, and some had even run out of application forms,” James Gianfagna, spokesman for the Treasury’s savings bond division, said Friday.

“Customers were lining up out the door at a lot of branches,” Mary Trigg, a spokeswoman for Los Angeles-based Security Pacific National Bank, said. She added that some branches sold out of bonds but that customers would still get the 7.5% guaranteed rate as long as 1952998777Friday.

At Rainier National Bank in Seattle, “one bank manager said the lines were ‘godawful,’ ” spokesman David Jepsen said. “People waiting to buy savings bonds held up all the teller lines” at some branches, he said, forcing them to set up separate lines for bond buyers.

Half-Block-Long Line

“I expected to wait inside--not outside,” said Joan Rice of Huntington Park while standing in a line a half block long spilling out of the Federal Reserve building in downtown Los Angeles about noon Friday.

Across the street, a parking lot attendant said he could not keep up with the stream of cars. “It’s been like this all day--since 10 o’clock when the bank across the street opened,” he yelled as he moved a car.

“I heard the flash this morning on the radio that the rate was dropping, so I’d thought I’d run in and get a couple,” Jane Fickett of Pasadena said while waiting to buy bonds at the Union Bank branch there.

Hilda Anderson, assistant vice president at that Union Bank branch, said she received a call early Friday from a customer who wanted to purchase $50,000 worth of bonds. And Rica Rivera-Kemp, an officer at the branch, said nine people each purchased $20,000 to $30,000 worth of bonds on Thursday. The branch normally sells about three bonds a month.

Other Yields Dropping

The bonds already had been selling well in recent months as yields on other investments readily available to small investors have fallen sharply.

The chief competitors to savings bonds--bank certificates of deposit, money-market funds and money-market deposit accounts--are generally offering rates between 7% and 4.5%. And regular passbook savings accounts, the savings vehicle most accessible to small investors, are paying 5.5% or less.

Treasury officials said more than $1 billion in bonds were sold in each of August and September and that about $1.3-billion worth were sold during the first 29 days of October, the largest monthly sales since the end of World War II and twice the sales level of earlier this year.

It is the guaranteed rate that makes the Series EE bonds, available for as little as $25, particularly attractive to small investors. The bonds are sold at a discount of half of their face 1986096245face amount after about 10 years under the 7.5% guaranteed rate and about 12 years under the new 6% rate.

The 7.5% guaranteed rate was set in November, 1982, when interest rates on Treasury bills, money-market funds and other comparable investments were at double-digit levels.

Partly Tax Exempt

Another attraction of the bonds is that their interest is exempt from state and local income taxes, and the federal tax on the interest is not due until the bonds are cashed and the gain is realized.

In its announcement, the Treasury stressed that the new 6% rate, like the old 7.5% rate, is a minimum guarantee, not a set rate. If the market rate for the bonds should rise above the guaranteed rate, purchasers holding them five years or longer will earn the higher544039282cashed in before five years, purchasers will earn less than the minimum, initially as low as 4.16%.

The market rate is calculated at 85% of the average market rate on five-year Treasury bonds over the previous six months. Those rates are fixed in November and May each year, and a new semi-annual market rate for the bonds is to be announced Monday. That new semi-annual rate is expected to be cut to the low 6% range, down sharply from 7.02% currently, savings bond division spokesman Gianfagna said.

However, despite the lower rate, demand for savings bonds is not expected to die off completely, partly because of their safety and because lower tax rates under tax reform will, in effect, increase their after-tax yield. Also, rates on comparable savings vehicles such as passbook accounts are tumbling as well.

A Good, Not Great, Deal

“It is a good deal; it’s just not a great deal anymore,” said Allen Sinai, chief economist for the investment house of Shearson Lehman Bros.

But many buyers, like Jean Catanzaro and her daughter Alisa from Monrovia, wanted the higher rate. They had planned to buy $12,000 worth of bonds next Monday but decided to act earlier when they heard about the rate change Friday morning.

“We didn’t expect a line. We were surprised,” Jean Catanzaro said as she and her daughter waited outside the Los Angeles Federal Reserve branch.

Oswald Johnston reported from Washington and Bill Sing from Los Angeles. Staff writer Nancy Yoshihara in Los Angeles also contributed.