Faced with declining sales of U.S. savings bonds and a need to finance mounting deficits, the Reagan administration asked Congress yesterday to allow the Treasury to pay higher interest rates on the bonds.
The plan would tie bond rates to market securities and at today's rates, savings bonds would pay 11.6 percent interest instead of the current 9 percent maximum.
Mark E. Stalnecker, deputy assistant Treasury secretary for federal finance, also urged the House Ways and Means Committee to repeal the interest rate ceiling on marketable U.S. bonds so the government can borrow additional long-term funds. The Treasury already has come up against its limit: no more than $70 billion in bonds paying more than 4 1/4 percent can be outstanding. Current rates on government long-term bonds are 13 1/2 percent.
While lengthening the maturity of the federal debt reduces the costs associated with frequent bond offerings, it can have negative consequences on the economy, another witness said later. When the government issues long-term bonds, it tends to "crowd out" other private borrowers, forcing them into the more expensive short-term market, he said. This restricts industry's access to the capital needed to improve productivity.
Interest on the national debt is estimated at $116 billion in this fiscal year and may rise to $134 billion in the next, Stalnecker added. However, the government will not be able to borrow at all by the end of May unless Congress once again raises the debt ceiling.
Sales of savings bonds reached a peak of $80.9 billion in 1977-78. Since then, savers looking elsewhere for higher yields have redeemed more bonds than they have purchased. The resulting drain of $27.8 billion now must be financed by more expensive Treasury borrowings.
To alleviate this need, the administration wants to issue a market-rate bond that would earn interest at a rate equal to 85 percent of the average market yield on five-year Treasury securities or a guaranteed minimum rate, whichever is higher. (The minimum was not specified.) Existing and newly issued bonds would get this rate after five years. The current yield on five-year Treasury securities is 13.625 percent, so the rate on savings bonds would be 11.6 percent if the new bonds were being issued now.
Currently, Series EE bonds yield 9 percent, compounded semiannually, when held to a maturity of eight years. Series HH bonds yield 8 1/2 percent after 10 years. Rather than set a new ceiling, the Treasury asked for the authority to increase or decrease the rates as comparable market rates change.
Savings bonds have tax-deferral advantages that increase their yields compared with other securities when the taxes are paid. They are also redeemable at par, which eliminates the risk of market fluctutions. Consumer groups have asked for better terms for small savers than the Treasury is offering, and Stalnecker indicated the 85 percent ratio might be changed if the bonds sales do poorly.