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Treasury Yields May Ease as U.S. Changes Auction System

Investing: New method is likely to slightly reduce rates. Meanwhile, Savings Bond purchases will get easier.


The U.S. Treasury Department announced two changes Wednesday that are likely to lead to lower yields on government securities while also making Savings Bonds easier to buy.

The Treasury, which plans to auction $38 billion in notes and bonds next week in the government's regular quarterly financing, said Wednesday that it will conduct all future government securities sales based on a so-called Dutch auction, or single-price, format.

That means each bond offering will be sold at the single 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 within a fairly narrow range, on its head.

In effect, it nullifies the ability of big institutional investors to use their buying clout to get a better yield.

And because individual investors who have bought bonds directly from the government through the so-called Treasury Direct program have been used to getting the average price paid by all purchasers, the old system may have allowed for slightly better yields for individuals.

Now that loss of bargaining power by the big boys could result in lower yields for small investors, as everyone gets the same yield.

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."

In general, thanks to the huge budget surplus, Uncle Sam is borrowing a lot less money, which is good news for taxpayers but bad for savers in that it helps keep downward pressure on interest rates.

In a second change announced Wednesday, the Treasury said that 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 next week, 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

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.

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