The Treasury Department on Monday raised its interest rate on U.S. savings bonds to 7.17% from 5.84%, an increase that is expected to spark new purchases of the bonds as investors look for safe alternatives to topsy-turvy stocks and as rates on other savings products drop.
The new rate on the Series EE bonds is the highest since the 8.36% rate offered between November, 1985, and May, 1986.
The new rate means that investors purchasing savings bonds between now and April 30, 1988, will earn an annual rate of 7.17% for the first six months that they hold the bonds, provided that they hold them for at least five years. Those holding for less than five years will earn between 6% and 4.16%.
"There's a lot of interest in savings bonds right now. Whether it's because of the stock market turmoil, I don't know, but there's been a lot of interest in the new rate," Treasury spokesman Stephen Meyerhardt said.
Although nationwide figures are not yet available, a number of banks have reported sharp increases in sales of savings bonds following the Oct. 19 Black Monday stock market debacle. Los Angeles-based Security Pacific National Bank, for example, reported a 50% jump in sales for the week of Black Monday. Savings bonds appeal to safety-conscious investors because their interest and principal are backed by the full faith and credit of the U.S. government.
Sales may jump further because many people are believed to have been holding off purchases until Monday's rate increase. Treasury officials had indicated earlier that the new rate would likely top 7%.
Sales also may increase as rates on certificates of deposit and Treasury bills fall amid post-crash moves by the Federal Reserve Board to pump money into the financial system to lower interest rates. The average rate on six-month CDs nationally fell to 7.07% last week from 7.21% the week before, while the average on five-year CDs fell to 8.27% from 8.43%, according to Bank Rate Monitor, a North Palm Beach, Fla., newsletter.
Rates on savings bonds are adjusted every May 1 and Nov. 1 to equal 85% of the average yield on five-year Treasury securities for the previous six months. Investors must hold the bonds for five years to receive those semiannual market rates. Those holding at least five years are guaranteed a minimum rate of 6%, no matter how low market rates go.
Savings bonds are bought at half of their face value and mature in about 12 years at current interest rates. The bonds can be purchased for as little as $25 ($50 face amount) from banks, savings and loan associations, Federal Reserve banks and branches, and payroll savings plans.