Treasury Yields May Ease as U.S. Moves to ‘Single-Price’

The Treasury announced two changes Wednesday that are likely to lead to lower yields but also make its securities easier to buy.

That’s the crux of two announcements made Wednesday by the Treasury Department, which plans to auction $38 billion in notes and bonds next week in the government’s regular quarterly financing.

Specifically, the Treasury has made two changes--one technical, one practical.

The technical change: All future Treasury security sales will be based on a so-called Dutch auction, or single-price, format. That means the bonds will be sold at the highest yield needed to sell all of the securities.

That turns the current market system, which for many Treasury securities allows different bidders to buy at different yields, on its head. In effect, it nullifies the ability of big institutional investors to use their clout to get a better yield.

And because individual investors who bought bonds directly from the government through the so-called Treasury Direct program previously got the average price paid by all purchasers, any loss of bargaining power by the big boys affects the average--and thus may result in lower yields for small investors.

The hit is likely to be modest--a matter of a few basis points, industry experts predict.

(Each basis point equals 1/100 of a percentage point. A 3-basis-point difference, for example, would mean a yield of 5.00% rather than 5.03%.)

“The difference might work out to a basis point or a half a basis point,” said David Ballantine, vice president of Payden & Rygel, a Los Angeles investment firm.

“The impact on the individual investor is going to be relatively minimal,” he said.

Richard Lehmann, publisher of the Income Securities Advisor, a Miami Lakes, Fla.-based newsletter for fixed-income investors, says the cost could be more significant--in the range of 10 to 15 basis points. Still, that “cost” to investors benefits taxpayers.

“Most of these investors can well afford it,” Lehmann said. He added that Treasuries are increasingly being snapped up by institutional buyers in foreign countries. “If our taxpayers benefit because foreign investors have to pay a little more, all the better.”

The practical change: Starting Monday, U.S. Savings Bond buyers will be able to make automatic purchases through bank account withdrawals.

In the past, investors had two options when they wanted to buy Savings Bonds. They could purchase them through a bank or broker, or, if their company offered it, they could get them through payroll deductions. But only about 45 million Americans work for companies with such payroll deduction plans, said Pete Hollenback, a spokesman for the U.S. Treasury.

But starting Monday, the Treasury will offer the so-called EasySaver Plan. This will allow individuals to authorize the Treasury to deduct set amounts from their checking accounts each month to buy Savings Bonds.

Those who wish to set up an account can call (877) 811-SAVE or download a form from the Treasury’s Web site at https://www.easysaver.gov.

It takes about four weeks to set up the account. After that, the Treasury will begin debiting your bank account the designated amount and sending you the bonds you requested.

Two types of Savings Bonds are available through this program: the Series EE, which sell for half their face value in denominations ranging from $50 to $1,000, and inflation-indexed Savings Bonds, which sell for their face value.