Treasury Gets Compulsive in Paying Interest
When people who held Treasury bills, Treasury notes or bonds got a notice from the government about a new program called “Treasury Direct,” not everyone was thrilled. The government will no longer be sending investors checks for their interest or principal on securities sold from now on. Instead, investors will have to designate a financial institution, and the government will directly deposit any monies due into their accounts. As a Treasury Department brochure says, “you need never worry again about lost or stolen checks.”
Actually, some people were more upset by the announcement, judging by their complaints to Treasury, their congressmen and the media. They particularly object to what Los Angeles musician Herman Stein calls “the element of compulsion in the new system”--an element not present with Social Security or most corporate employers, which offer direct deposit as an option. Treasury, says Stein, “is forcing people to deal with a bank--precisely the people whose faith in the banking system is somewhat less than absolute.”
Many, ironically, seem offended by one of modern banking’s greatest advances--electronic fund transfer. Under the Treasury’s new plan to cut down on paper-processing, individual investors should get their money faster and surer, without ever having to handle it.
Indeed, security has always been the appeal of these investments, not the yields, which range now from almost 7% on a three-month T-bill to almost 9% on a 30-year bond. But they’re backed by the government. “I buy T-bills because they’re safe,” says Harry Shaw, a retired fund-raiser in Los Angeles. “To me, protecting the principal is the most important thing. I don’t care about an interest point here or there, and I feel very insecure with banks.”
Collecting Was Difficult
They were never even an easy investment, not even the popular Treasury bills. At three, six, and 12-month maturities, they’re the shortest-term loans a citizen can make to his government, but a little involved: Because they’re sold at a discount, investors submit their face value ($10,000 minimum) and get back the discount, or yield, in a week. One could mail a certified check--a week ahead of the offering date--to the Treasury’s Bureau of the Public Debt, which handles the government’s marketable securities and savings bonds, or to a branch of the Federal Reserve Bank. One could also go in person to the nearest Fed branch. Or one could pay one’s bank a $25 to $50 fee to make the purchase.
Getting one’s interest and principal could be equally involved on T-bills, or notes (one to 10-year terms) or bonds (terms over 10 years). Government payments on the T-bills or registered notes were mailed, then had to be taken to a bank: “Treasury got a nice float because they weren’t cashed immediately,” says David Liebschutz, spokesman for the Bureau of the Public Debt in Washington. “Bearer” notes and bonds involve coupons--which can be cashed by anyone--and must be taken to financial institutions, which redeem them (for a fee) and deposit the money in the investor’s account.
Under Treasury Direct, the investor will deal only with Treasury or the Federal Reserve, by mail or in person. Like T-bills, all three instruments will be issued in “book-entry form” rather than actual certificates, i.e. all transactions are recorded in the investor’s personal account. Finally, all payouts will be transferred electronically, on the due date, to the investor’s designated financial institution.
Expects Big Savings
All notes and bonds purchased by individual investors after last August are now on Treasury Direct. As for T-bills, all one-year bills sold since last January are on Treasury Direct, all 26-week bills after July and all 13-week bills after Oct. 8.
As many investors suspect, Treasury Direct is also better for the Treasury, which expects to realize “multimillion-dollar savings over the course of several years,” Liebschutz says. For one thing, he says, “every check sent is said to cost the government 26 cents, including postage, while every direct deposit costs three cents.” For another, the Bureau of Public Debt reduced its staff by 350 people (out of 2,500) because it doesn’t have to handle all those registered securities “with coupons and addresses that need updating,” and the Secret Service, which has had to investigate 200,000 government checks lost or stolen every year, should have some cut in its workload.
All to the general good, one would think, but some investors are fearful. Some just like to see and handle their money, even if they lose time and interest. Some suspect that adding a bank to the arrangements would add to, rather than cut, the possibility of error or loss. “If you can do something yourself, you can control it,” Stein says. “Now there’s a third party to deal with. I fear having to call the bank and ask, ‘Did you get my money?’ ”
Others suspect the banks will benefit, at some cost to the investor. Banks, they say, could take their time posting the credit, or could charge for making the deposit.
Based on prior interviews and panels of “typical T-bill buyers,” the Treasury anticipated some “initial reluctance,” Liebschutz says. But investors are forgetting that the deposits are in electronic, not check form, and the deposit date is predictable and reliable. “There should be no lag at all,” he says. “We set the system up so that those funds are available on the due date.”
There may be some room for investor insecurity, however. At a half-dozen banks or savings and loans recently called, customer service representatives had never heard of either Treasury Direct or the program behind the name. All agreed that in such a system, the only confirmation of the deposit would be given in a monthly statement or in response to a phone inquiry. And one executive “assumed” that banks would eventually charge account-holders for handling such deposits.
