U.S. SAYINGS BONDS

[Pages:4]May 1956

MAY 1, 1956 was the 15th anniversary of the first sale of the Series E United States savings bond. Since 1941 this bond has been the heart of the United States savings bond program. It is currently owned by more than 40 million individuals and represents nearly one-seventh of the Federal debt.

Treasury sales of savings bonds did not begin with the E series in 1941, nor have they consisted only of E bonds since 1941. From 1935 through April 1941 the Treasury sold approximately $4 billion savings bonds, known successively as Series A

U.S. SAYINGS BONDS

through D issues; in 1941 Series F and G savings bonds were offered as well as E's; and in 1952, when the savings bond program was reorganized, Series J and K bonds were substituted for the F's and G's and a new H series was inaugurated.

From the beginning, in 1935, the underlying purpose of the savings bond program has been to provide small savers with a safe, liquid, and attractive investment, while at the same time broadening the ownership of the Federal debt. The intention has been to encourage thrift as well as to interest citizens in the fiscal affairs of their Government. Beyond this broad continuing objective, savings bonds have been adapted to the temporary fiscal requirements of the Treasury.

From 1935 to 1941 the Treasury gained useful experience in selling savings bonds and small savers became familiar with this type of investment. In most important respects the Series A-D issues of this period were identical with the more familiar E's. Like the E's, they were nonmarketable bonds sold on a discount basis, yielding 2.9 per cent if held 10 years to maturity, and redeemable on demand at a yield sacrifice before maturity.

1940

1945

1950

1955

NOTE.--Treasury Department data for calendar years. Redemptions are at issue price. Special offerings of Series F and G bonds explain the 1948 and 1950 sales increases shown in the lower grid of the chart.

WARTIME EXPERIENCE

Series E, F, and G savings bonds were introduced in 1941 as part of an expanded program of defense financing, and later they were adapted to the more pressing needs of war finance. They attracted savings directly from the public, thereby reducing the need for Treasury borrowing from

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banks, and they immobilized excess cash balances which might otherwise have bid up prices of scarce consumer items. In addition, the feature that permitted redemption before maturity without capital loss appealed to investors who remembered the decline of prices on marketable Government bonds after World War I.

Intensive utilization of the sales techniques developed from 1935 to 1941, introduction of the payroll savings plan, and expansion of sales outlets all contributed to an extraordinary increase in savings bond sales after 1941. Other contributing factors were appeals to patriotism, and the dearth of consumer goods and private investments as alternative uses for excess cash.

Sales of E bonds rose from approximately $1 billion in 1941 to $12.4 billion in 1944. While sales of F and G bonds expanded more slowly, they also rose from $1.4 billion to $3.7 billion. Savings bonds outstanding rose from about $3 billion in 1940 to more than $40 billion at the end of 1944, and from 6 to approximately 18 per cent of the Federal debt.

Before the war, A-D bonds were sold to both individuals and institutions, but annual purchases per buyer were limited to $10,000 (maturity value). The offering of F and G bonds in 1941 was the first of several changes in terms, each of which has increased the annual availability of savings bonds to larger investors. While only individuals could buy the new E bonds and only in amounts up to $5,000 a year (maturity value), both individuals and institutions could purchase F and/or G bonds in amounts up to $50,000 a year (cost price). In 1942 this upper limit was raised to $ 100,000. Yields at maturity (12 years) on F and G bonds were 2.53 and 2.50 per cent. The F series was a discount issue,

like the E's, but the G series was an income bond designed for coupon-conscious investors. Purchased at par, the G's paid interest semiannually and were redeemable before maturity at less than par.

EARLY POSTWAR EXPERIENCE

As the war drew to a close, the pace of E bond redemptions accelerated. When it became apparent in 1946 that the postwar problem was scarcity rather than unemployment of resources, the spending potential inherent in the nearly $50 billion of redeemable savings bond debt was considered to be an inflationary threat. The postwar savings bond program was therefore focused on maintaining the savings bond debt intact, with sales efforts directed toward offsetting redemptions.

In the early postwar years (1946-50) total sales of savings bonds declined but nevertheless exceeded redemptions.1 Behavior differed, however, for small and large denomination bonds. For E bonds; in denominations of $100 or less, redemptions exceeded sales. For larger denomination E bonds, the balance was reversed; in the years 1947 through 1949, sales exceeded redemptions by more than $1.0 billion annually. Net sales of F and G bonds also continued in the early postwar period, totaling between $1.5 and $2.4 billion in every year but one from 1946 through 1950.

KOREA AND AFTER

Beginning in 1951, the over-all balance in the Treasury savings bond program shifted from net sales to net redemptions. Net redemptions exceeded $1 billion in 1951, reflecting a cut in sales to less than $4 billion, the smallest amount since 1941. After

1 Throughout this article redemptions are considered at issue price, excluding accrued discount.

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FEDERAL RESERVE BULLETIN ? MAY 1956

UNITED STATES SAVINGS BONDS

End of calendar year

Amount outstanding

Net sales or redemptions (--)3

(In billions)

As a

percent-

In age of

billions *

total Federal

All series

A-E F, G, J and H and K

1940.. 1941.. 1942.. 1943.. 1944..

$ 3.2 6.1 15.1

27.4 40.4

1945. 1946. 1947. 1948. 1949.

48.2 49.8 52.1 55.1 56.7

1950. 1951. 1952. 1953. 1954. 1955.

58.0 57.6 57.9 57.7 57.7 57.9

1956 (end of April). 57.7

6.3 $ .9

9.6

2.9

13.5

8.8

16.2 12.2

17.5 12.7

17.4

7.5

19.3

1.2

20.5

1.8

22.0

2.5

22.2

1.1

22.8 22.4 21.8 21.1 20.9 20.8

-1.2 -.4 -.3

-.2 -.2

21.2 - . 5

$ .9 1.5 5.7 8.9 9.3 4.7

-1.2 '.2 .3

-.9 \l

1.0 1.4

1.4 3.1 3.3 3.4

2.7 2.4 1.9 2.2

1.5 -.3 -.3 -1.1

-1.1

-1.6

-1.0

1 Current redemption value; includes accrued interest. 2 Total direct and guaranteed interest-bearing debt. 3 Redemptions at issue price; details for series may not add to total because of rounding.

1951, sales recovered and in 1954 and 1955 rose to the highest levels since 1948. Although gross redemptions reached historical peaks in 1954 and 1955 and continued to exceed sales, the margin of net redemptions narrowed to negligible proportions.

The shift to net redemptions after 1950 was initially an outgrowth of the Korean War. Price increases during late 1950 and early 1951 led to anticipatory buying of goods, which inhibited regular savings bond sales and encouraged redemptions. After the return to relative price stability in 1951, market interest rates began to rise. By the year-end yields on marketable Treasury securities with maturities equivalent to those of savings bonds had advanced above the 2.5 per cent rates obtainable from Series F and G bonds, and interest returns on other investments had also risen. During the year sales of F and G bonds declined nearly 70 per cent from their 1950 level.

To adjust to current market conditions,

in April 1952 the Treasury revised the terms of its savings bond offerings. Purchase limits were raised from $10,000 to $20,000 on E bonds and from $100,000 to $200,000 on new J and K bonds, which were substituted for the F's and G's. The yield at maturity on J's and K's was set at 2.76 per cent, and the yield on E's was raised to 3 per cent. A new H bond was inaugurated in denominations of $500 to $10,000, and a $10,000 denomination E bond was offered for the first time. The new H series was an income bond like the G's, but it resembled the E's in eligibility, purchase limits, and yield.

Sales response to the 1952 revision of terms was slow, partly because of further interest rate advances in late 1952 and the first half of 1953. Beginning with the full year 1953, however, sales gained steadily. In part this pickup reflected renewed promotion of savings bonds by the Treasury, the growing popularity of the new H series, and the decline of market interest rates from mid-1953 to mid-1954. Sales of J and K bonds were particularly responsive to the 1954 decline of interest rates, nearly tripling their 1953 level. By the end of 1955, although rising market yields had again erased the marginal advantage of fixed yields on J's and K's, 1955 sales were double the 1953 level.

Starting in May 1953 savings bond redemptions began to be dominated by the large maturities of the F and G series initiated in 1941 as part of war financing. Maturities of E bonds had first appeared in 1951, but had not caused any marked change in the level of total redemptions because owners of maturing issues had generally elected to take advantage of the Treasury option to extend their holdings for a second investment period. In 1952, fur-

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thermore, when other savings bond terms were revised, the yield on extended E's had been raised from 2.9 to 3.0 per cent. It was decided, however, not to extend comparable options to holders of F and G maturities, and as a result redemptions of maturing F's and G's from 1953 through 1955 more than offset net sales of all other series.

Recently, market interest rates have advanced above the fixed yields on all savings bonds, a situation that has existed only once before, in late May and early June 1953. Partly in consequence, in the first four months of 1956 savings bond sales were 13 per cent below the same period in 1955, with declines in H, J, and K issues.

At the end of December 1955 savings bonds outstanding totaled $57.9 billion, about 21 per cent of the Federal debt and about 35 per cent of liquid assets as rep-

resented by time deposits and savings and loan shares, as well as savings bonds. Savings and loan shares totaled $32.3 billion and time deposits $76.6 billion. About $7 billion or 12 per cent of the savings bond debt reflected accrued discount, and $37.5 billion or approximately 65 per cent represented E bonds.

Taking the period as a whole, since the program was first introduced the Treasury has provided useful investment instruments that have met the varying needs of millions of small savers. As a result, savings bonds are now widely held and in the aggregate make up a substantial part of the Federal debt. In recent years the outstanding total of these special securities has been remarkably stable.

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