View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Fe d e r a l

reserve bank of

Dallas

FISCA L AGENT O F T H E UNITED STATES
DALLAS. TEXAS 7 5 2 2 2

Circular No. 69-173
July
1969

I,
k

To All Issuing Agents and Others Concerned
in the Eleventh Federal Reserve District:

The enclosed press statement and related material
concerning a proposed rate increase on savings bonds was
released on July 11.

Additional copies will be furnished

upon request.
FEDERAL RESERVE BANK OF DALLAS
Fiscal Agent of the United States

Enclosures

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

TR E A S U R Y D E P A R T M E N T
WASHINGTON, D .C .
J u l y 11,

1969

FOR IMMEDIATE RELEASE
TREASURY SECRETARY KENNEDY PROPOSES
5 P E R C E N T R A T E ON S A V I N G S B O N D S

S e c r e t a r y of the T r e a s u r y D a v i d M. K e n n e d y t o d a y d i s c l o s e d
d e t a i l s of the N i x o n A d m i n i s t r a t i o n ' s r e q u e s t to C o n g r e s s for
l e g i s l a t i o n to p e r m i t the p a y m e n t o f a 5 p e r c e n t r ate of i n t e r e s t
to i n v e s t o r s in U n i t e d S t a t e s S a v i n g s B o n d s 0 He s a i d t h a t in the
s ame p r o p o s a l the A d m i n i s t r a t i o n w o u l d s e e k r e m o v a l of the
4 - 1 / 4 p e r c e n t i n t e r e s t c e i l i n g on all T r e a s u r y b o n d s .
T h e m a x i m u m r a te t h a t m a y b e p a i d on a n y T r e a s u r y b o nd,
i n c l u d i n g S a v i n g s Bonds, is n o w 4 - 1 / 4 p e r c e n t , a s t a t u t o r y
l i m i t a t i o n w h i c h h a s b e e n u n c h a n g e d s i n c e 1918.
Mr. K e n n e d y d i s c l o s e d the i n t e n t i o n to a s k for this
l e g i s l a t i o n d u r i n g h is t e s t i m o n y e a r l i e r t his w e e k b e f o r e
S en a te F i n a n c e C o m m i t t e e .

the

In s u b m i t t i n g the p r o p o s a l , the S e c r e t a r y e m p h a s i z e d
his h o p e
that the H o u s e W a y s and M e a n s C o m m i t t e e c o n s i d e r a t i o n of
the l e g i s l a t i o n w o u l d a w a i t the c o m p l e t i o n of w o r k on tax reform.
He s aid t h a t C o m m i t t e e e n a c t m e n t of a m e a n i n g f u l tax r e f o r m
p r o p o s a l on the e a r l i e s t p r a c t i c a b l e d a t e is a m a t t e r o f h i g h e s t
priority.
A b o u t $52 b i l l i o n o f S e r i e s E a n d H S a v i n g s Bonds are
outstanding.
A p p r o x i m a t e l y 11 m i l l i o n p e o p l e are n o w b u y i n g b o n d s
t h r o u g h a p a y r o l l s a v i n g s plan.
The p r o p o s e d 5 p e r c e n t rate w o u l d
a p p l y to S a v i n g s Bonds p u r c h a s e d a f t e r J u n e 1, 1969 and h e l d to
maturity.
Holders of o u t s t anding Savings Bonds wo u l d also receive
a 5 p e r c e n t rate for the r e m a i n i n g p e r i o d to m a t u r i t y a f t e r
J u n e 1, 1969.
T r e a s u r y is r e c o m m e n d i n g the i n c r e a s e in rate b e c a u s e the c u r r e n t
4 - 1 / 4 p e r c e n t r e t u r n is n o t c o m p e t i t i v e w i t h o t h e r i n v e s t m e n t and
savings opportunities.
R e d e m p t i o n s h a v e b e e n r u n n i n g a h e a d of sales
for s e v e n s u c c e s s i v e m o n t h s .
I n June, r e d e m p t i o n s w e r e $483 m i l l i o n
a n d s ales w e r e $383 m i l l i o n 0
T h e l a s t t i m e s a v i n g s b o n d rates w e r e
r a i s e d was in June, 1968 w h e n t h e y w e n t to the p e r m i t t e d c e i l i n g of
4-1/4 percent from 4.15 percent.

K-141

-

2

-

The 4-1/4 percent interest rate ceiling applies to all
Treasury bonds, including longer term marketable securities with
maturities of more than 7 years.
In the past, such bonds played
an important role in providing the flexibility for orderly
management of the Federal debt.
Treasury has been unable to sell any marketable bonds since
May of 1965 because longer term interest rates have been above
the 4-1/4 percent ceiling.
Instead it has had to rely on short
term instruments -- bills and notes -- on which there is no
interest rate ceiling.
As a result, the average maturity of
the privately held marketable debt has dropped about 30 percent
since mid-1965.
Treasury is seeking the removal of the ceiling in order
to permit the orderly restructuring of the public debt in
accordance with national objectives.
Subject to enabling legislation, the proposals effect
Series E and H bonds and the Freedom Share as f o l l o w s :
E and H B o n d s :

The new rate of 5 percent to maturity
will apply to all bonds sold on or
after June 1, 1969.
As in the past,
bonds redeemed prior to maturity will
earn a lesser yield but these interim
rates have been improved over the
current schedule.
For example, in the
case of E Bonds at 6 months the new rate
will be 3.20 compared to the current
2.24.
At 1 year the new rate will be
4.01 compared to the current 3.02 and
at 3 years 4.44 compared to 3.75 percent.
The lower rate of return for short term
holdings reflects the desire of the
Treasury not to compete unduly with
private saving institutions and to retain
an incentive for purchasers to hold their
bonds to maturity.
Beginning with the first se mi ­
annual interest period starting on or
after June 1, 1969, rates on outstanding
E and H Bonds will be increased to yield
5 percent when held to maturity or extended

- 3 maturity.
These outstanding bonds will
also benefit by an improved interim
schedule in the case of earlier
redemptions.
Holders are assured there
will be no advantage in redeeming
currently outstanding bonds to
purchase new b o n d s „
The dollar limit on annual
purchases of E Bonds by an individual
will be reduced to $5,000 purchase
price from the $20,000 face amount
limit currently in force.
The
annual limit on H Bonds will be
reduced to $5,000 face amount from
the current $30,000 (on H Bonds the
issue price is the same as the face
a m o u n t ) . Nontaxable exchanges of
Series E Bonds for Series H Bonds
will not be counted against these
new annual purchase limits.

The original maturity of the
Series E Bond will be shortened to
5 years 10 months from the current
7 years.
The maturity of the Series H
Bonds will continue to 10 years.
Both
bonds will be extendible at the
discretion of the Secretary of the Treasury.
Freedom S h a r e :

The Freedom Share will continue on
sale for 6 months following Congressional
approval of the proposed legislation.
This continuation period will provide
a reasonable time for subscribers to
convert to the purchase of savings bonds
and will also facilitate payroll and
accounting changes.
Legislation is being
requested to provide authority for an
extension of Freedom Shares similar to
those available on savings bonds.

oOo

FACT SHEET

REMOVAL OF 4-1/47, INTEREST RATE CEILING

I.

The Present Situation

%

1. Congress placed a 4-1/4 ceiling on U.S. Government
bonds in 1918, and the ceiling has been unchanged
since that date.
2. Throughout most of the intervening fifty years, the
ceiling posed no serious problems for effective
debt management because
1) long-term interest rates generally held
below the ceiling level; and
2) during brief periods of higher rates, the
Treasury could issue shorter-term
securities, such as Treasury bills or
notes, to which the ceiling does not apply.
3. Since 1965, interest rates on longer term
Government securities have continuously been
above 4-1/4%.
As a result the Treasury has
been unable to sell any longer-term securities
for the last four years.
Instead, it has been
forced to confine its issues to maturities of
seven years or l e s s . /
v
4. Because the interest ceiling precluded longer-term
issues, the average maturity of the G o v e r n m e n t ’s
marketable debt in private hands has dropped from
5-3/4 years in mid-1965 to about 4 years today.
5. In operational
meant that the
$21 billion of
1969, compared
fiscal 1966, a

terms, this shortening of the debt
Treasury had to refinance some
maturing notes and bonds in fiscal
with less than $14 billion in
jump of more than 50%.

Five years or less prior to June 30, 1967.

- 2 II.

Adverse Effects of the 4-1/4% Ceiling
1. Since the 4-l,/4% ceiling applies to Savings Bonds
as well as to marketable Government bonds, the
Treasury has been prevented from paying an equitable
and fully competitive rate of return to holders of
Savings B o n d s .
2. By forcing the Government to do all its financing
in the short- and medium-term areas, the ceiling
has put upward pressure on shorter term rates,
thus complicating the problems of thrift
institutions in competing for savings.
3. The pile-up of maturing notes and bonds added to
the difficulties of orderly financing the
G o v e r n m e n t ’s needs for new funds during periods
of deficit.
4. The shortening of the G o v e r n m e n t ’s debt contributes
to the inflationary potential of the economy by
1) complicating the task of the monetary
authorities in pursuing a policy of
credit restraint; and
2) providing investors with liquid assets
that increasingly resembled cash-in-hand.
5. During the past four years, a period of generally
rising interest rates, the ceiling has probably
added to the costs of carrying the public debt
by
1) concentrating Treasury financings in
the shorter end of the market where
rates have generally been higher than
on longer-term securities; and
2) preventing issues of longer-term
securities during temporary periods
of lower interest rates.

- 3 III.

Advantages

from Removal of Ceiling

1, Removal of the ceiling would mitigate each of
the adverse effects cited above.
2. Specifically,

the Treasury would

1) be free to pay a 5% rate of return to
holders of Savings Bonds, as proposed
b y the Administration;
2) be able to plan for orderly restructuring
of the G o v e r n m e n t ’s debt when conditions
permitted.
3 0 In general, removal of the ceiling will enable
the Treasury to conduct the nation*s financial
housekeeping in a way that supports national
economic objectives rather than conflicting
with them.

IV.

Use of Longer-term Borrowing
1. Removal of the 4-1/4% ceiling would not cause
the Treasury automatically to push large
amounts of debt out to the long-term area.
Rather, it would permit the Treasury to take
advantage of market opportunities gradually to
extend the maturity of the debt through longerterm issues in amounts that would not disrupt
either the Government securities market or
other segments of the capital market.
2.

The experience of the first half of the 1960's
is illustrative of what can be accomplished
through flexible debt management.
Mainly,
through the use of so-called advance refundings
offering of longer-term securities to holders of
issues in advance of their maturity -- the
Treasury was able to increase the average
maturity of the debt by more than 257o without
adverse effects on the financing of local
governments, house construction, or other
activities.

- 4 -

3, Given the anticipated demands on capital markets
to finance the high employment economy of the
1970's, there is little likelihood that longerterm interest rates will fall below the 4-1/4%
level in the foreseeable future.
There is no
reason, therefore, to delay the removal of a
ceiling that serves no purpose, but only stands
in the way of the orderly planning of debt
management.

oOo

-1 1 -6 9

Series E

Series H

By Treasury

Not callable

Not callable

By Owner

At any time not less
than 2 months from issue
date at any qualified
paying agent.

At any time not less
than 6 months from
issue date at any
Federal Reserve Bank
or branch, or at the
U.S. Treasury except
during the month
preceding an interest
payment date.

Negotiability

None

None

Eligibility as
collateral for loans

None

None

Eligible subscribers

Natural persons and public
and private organizations,
but not commercial banks.

Natural persons and
public and private
organizations, but
not commercial banks

Annual limit on new
purchases

Annual limit of $5,000,
issue price ($2,000 face
amount per participant
in employee savings plans).

Annual limit of
$5,000, issue price
($200,000 for certain
organizations when
received as gifts).

Denominat ions

$25, $50, $75, $100, $200,
$500, and $1,000 (maturity
value).
Also $10,000 and
$100,000 for certain
employee savings plans.

$500, $1,000, and
$5,000 ($10,000 for
use in certain
e x c h a n g e s ).

Bearer or
registered

Registered only, natural
persons may have co-owner
or beneficiary
registration.

Registered only,
natural persons may
have co-owner or
beneficiary
registration.

Extension privilege

Extendable for 10 years
at rate in effect at time
of extension.

Extendable for 10 years
at rate in effect at
time of extension.

Redeemability prior
to maturity:

7-11-69

Summary of Terms and Conditions of Savings Bonds
(Subject to enabling legislation)

Series E

Series H

Effective date

A ll bonds sold on or
after June 1, 1969.

All bonds sold on or
after June 1, 1969.

Issue price

75% of face amount.

100% of face amount.

Issue date

First day of month
in which payment is
received by an
authorized issuing
agent.

First day of month
in which payment is
received by a Federal
Reserve Bank or
branch, or by
U.S. Treasury.

Maturity

5 years 10 months from
issue date.

10 years from
issue date.

New bonds

Accrues to approximately
face amount to provide
an investment yield of
approximately 5% if held
to maturity, lesser
yields if redeemed
earlier.

Paid semi-annually
by check.
Provides
investment yield of
approximately 5%, if
held to maturity,
lesser yields if
redeemed earlier.

Outstanding bonds

Increased to provide
5% for remaining time to
maturity or extended
maturity.

Increased to provide
57o for remaining
time to maturity or
extended maturity.

Inte r e s t :

QUESTIONS AND ANSWERS ABOUT
UNITED STATES SAVINGS BONDS

Q:

What is the Treasury proposing regarding the statutory
interest ceiling on United States Savings Bonds?

A:

Treasury is asking Congress to lift the ceiling and
provide legislation whereby the rate on Savings Bonds
could be set by Treasury at a rate consistent with
marketing conditions, fairness to the investors and
not unduly competitive with thrift institutions.

Q:

What rate does Treasury propose to set currently on
savings bonds?

A:

Treasury proposes that the rate on new bonds be set
at 5 percent, effective from June 1, 1969, and that
the rate paid on existing bonds be adjusted, so that
they will also earn at the rate of 5 percent to
maturity for interest periods beginning after
June 1.

Q:

What is the current rate?

A:

Savings bonds now receive the statutory limit
4-1/4’ percent per annum.

Q:

When was this rate set?

A:

The general statutory ceiling for bonds was set in
1918.
The current rate on savings bonds was raised
to the legal limit of 4.2 5% in June 1968 from
4.15%.

Q:

Why raise the rate on savings bonds?

A:

Rates paid by many savings institutions are higher, and
have been higher for several years.
Market rates have
also risen substantially.
The 4-1/4 percent rate paid
on savings bonds has failed to attract new savers and
new purchasers.
As a matter of fact, redemptions of
savings bonds have exceeded sales for the last seven
months.
In June, redemptions of $483 million exceeded
sales by $100 million.

of

-

2 -

Q:

To what savings bonds would the new rate apply?

A:

All savings bonds, both Series E and Series H, new
issues and outstanding issues.

Q:

What are the characteristics of these bonds?

A:

Series E bonds are sold at 75% of face value.
Interest
is paid by the gradual increase in redemption value,
reaching approximately face amount at the end of their
stated original maturity.
The currently proposed bond
will reach original maturity in 5 years 10 months.
Older bonds had various original maturity lengths up
to 10 years. They are non-negotiable and may only be
redeemed by the Treasury or an authorized redemption
agency.
In practice, most banks and other financial
institutions redeem Series E bonds.
Series H bonds are
10 year bonds sold at par on which interest is paid by
semiannual checks issued by the Treasury.
They are
also non-negotiable.

Q:

A:

Q:

A:

Will there be any change in denominations in which
bonds are sold?
Yes.
Series E bonds will be sold in denominations of
$25, $50, $75, $100, $200, $500, $1,000 maturity value.
They will no longer be sold in denominations of
$10,000 except for employees savings plans.
Series H
bonds will be sold in denominations of $500, $1,000, and
$5,000.
They will no longer be sold in denominations of
$10,000.
The $10,000 denominations will also be
available for exchanges.

Is there any limit on the amount of savings bonds one
may buy?
Yes.
The annual limit on Series E bonds will be set at
$5,000 issue price -- a reduction from $20,000 face amount
and the yearly limit on Series H bonds will be set at
$5,000 issue price -- a reduction from $30,000 (issue price
and face amount are the same for Series H b o n d s ) .

- 3 -

Q:

Why the smaller annual limit?

A:

This is largely a technical matter involving other
savings and thrift institutions, such as savings and
loan associations which finance much of the nation's
housing.
Treasury has no desire to cause a shift
from these institutions into savings bonds.
Its
primary objective is to promote new savings.

Q:

A:

Will present holders of savings bonds benefit from
the new rates?
Yes.
The new rates will apply to all savings
bonds
effective the first interest crediting period beginning
on or after June 1.
The rate on bonds currently
outstanding will be adjusted so that they will receive
5 percent to maturity or extended maturity.

Q:

What will happen to Freedom Shares?

A:

Freedom Shares, first offered in 1967, will continue on
sale for six months after the proposed legislation is
passed.

Q:

Is there any reason for present holders of savings
cash them in for the new issues?

bonds to

A:

No.
Rates of return on all outstanding issues are
being
improved so that there is no incentive for such conversions.

Q:

If savings bonds are redeemed prior to maturity does the
holder receive a lower rate of interest?

A:

Yes, but the interim yields have been substantially
improved.
For example holders of both E and H Bonds will
receive 4 percent or more after the first year.

oOo

7 -1 1 -6 9


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102