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FEDERAL RESERVE BANK OF NEW YORK Fiscal A gent o f the United States P lircu la r N o . 6 3 6 4 J u ly 14, 1969 TREASURY SECRETARY KENNEDY PROPOSES 5 PERCENT RATE ON SAVINGS BONDS To Issuing Agents for Series E Savings Bonds, and Others Concerned, in the Second Federal Reserve Districtj Following Is the text of a statement issued July 11 by the Treasury Department: Secretary of the Treasury David M. Kennedy today disclosed details of the Nixon Administration’ s request to Congress for legislation to permit the payment of a 5 p er cent rate of interest to investors in United States Savings Bonds. He said that in the same proposal the Administration would seek removal of the 4 1 /4 percent interest ceiling on all Treasury bonds. The maximum rate that may be paid on any Treasury bond, including savings bonds, is now 4 1 /4 percent, a statutory limitation which has been unchanged since 1918. Mr. Kennedy disclosed the intention to ask for this legislation during his testimony earlier this week before the Senate Finance Committee. In submitting the proposal, the Secretary emphasized his hope that the House Ways and Means Committee consideration of the legislation would await the completion of work on tax reform. He said that Committee enactment of a meaningful tax reform p ro posal on the earliest practicable date is a matter of highest priority. About $52 billion of Series E and H savings bonds are outstanding. Approximately 11 million people are now buying bonds through a payroll savings plan. The proposed 5 percent rate would apply to savings bonds purchased after June 1, 1969 and held to maturity. Holders of outstanding savings bonds would also receive a 5 percent rate for the remaining period to maturity after June 1, 1969. Treasury is recommending the increase in rate because the current 4 1 /4 percent return is not competitive with other investment and savings opportunities. Redemptions have been running ahead of sales for seven successive months. In June, redemptions were $483 million and sales were $383 million. The last time savings bond rates were raised was in June 1968 when they went to the permitted ceiling of 4 1 /4 percent from 4.15 percent. 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. (Over) T rea su ry has been unable to s e ll any m arketable bonds since May of 1965 because longer te rm interest rates have been above the 4 1 /4 percent ceilin g. Instead it has had to rely on short te rm instrum ents — b ills and notes — on which there is no interest rate ceiling. A s a result, the average maturity of the privately held marketable debt has dropped about 30 percent since m id -1 9 6 5 . T reasu ry is seeking the rem oval of the ceiling in ord er to p erm it the orderly restructuring of the public debt in accordance with national ob jectives. Subject to enabling legislation, the prop osals affect Series E and H bonds and the Freed om Share as follow s: E and H bonds The new rate of 5 percent to maturity w ill apply to all bonds sold on or after June 1, 1969. A s in the past, bonds redeem ed p rio r to maturity w ill earn a le s s e r yield but these interim rates have been im proved over the current schedule. F or exam ple, in the case of E bonds, at 6 months the new rate will be 3.2 0 com pared to the current 2 .2 4 . At 1 y ea r the new rate w ill be 4 .0 1 com pared to the current 3.0 2 and at 3 y e a r s, 4 .4 4 com pared to 3 .7 5 percen t. The lower rate of return fo r short te rm holdings re fle cts the d esire of the T reasu ry not to compete unduly with private savings institutions and to retain an incentive fo r p u rch a sers to hold their bonds to maturity. Beginning with the fir s t semiannual 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 m aturity. These outstanding bonds will also benefit by an im proved interim schedule in the ca se of e a r lie r redem ptions. Holders are assured there will be no advantage in redeem ing currently outstanding bonds to purchase new bonds. The dollar lim it on annual purchases of E bonds by an individual will be reduced to $ 5 ,0 0 0 purchase p rice fro m the $ 2 0,00 0 face amount lim it currently in fo rc e . The annual lim it on H bonds w ill be reduced to $5 ,0 0 0 face amount fro m the current $30,000 (on H bonds the issu e p rice is the sam e as the face amount). Nontaxable exchanges of Series E bonds fo r Series H bonds w ill not be counted against these new annual purchase lim its . The original maturity of the Series E bond w ill be shortened to 5 y ea rs 10 months fro m the current 7 y e a r s . The maturity of the Series H bonds w ill continue to 10 y e a r s . Both bonds w ill be extendible at the discretion of the Secretary of the T reasu ry. Freedom Share The F reedom Share w ill continue on sale fo r 6 months following Congressional approval of the proposed legislation . This continuation period w ill provide a reasonable tim e fo r su b scrib ers to convert to the purchase of savings bonds and w ill also facilitate payroll and accounting changes. Legislation is being requested to provide authority fo r an extension of F reedom Shares sim ila r to those available on savings bonds. Additional copies of this c irc u la r w ill be furnished upon request. Alfred Hayes, President.
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