Money-Rates.com U.S. Treasury Report

Treasury News

For the first time, the Treasury Department is selling more securities to direct bidders (including foreign governments and individual investors) than they are selling to the large New York bond dealers, who have traditionally been the mainstay of the market for government debt. The strong appetite for Treasury-issued debt has helped keep bond yields near historic lows. The largest group of buyers of Treasury bill, notes, and bonds are foreign central banks, who are attracted to the stable inflation environment in the United States. The ability to keep demand high for US Treasuries is important for the Obama administration, which is facing mounting debt payments every month. If Treasury yields stay low due to strong demand, the government will then have to commit less money just to make interest payments to service the US debt. On the other hand, higher interest rates could cause the US deficit to soar as interest payments increase. Economists are forecasting that the central banks in China, Japan, and United Kingdom, who are the biggest buyers of US Treasury securities today, will remain strong buyers of US debt until the global recession ends.

The US Department of the Treasury announced this month the sale of over 1.1 billion shares of Citigroup stock. This brings to date a total of approximately 2.6 billion shares of Citigroup stock that the Treasury Department has sold on the open market. The gross proceeds of the combined sales of the government's interest in Citigroup were over $10.5 billion, which go back in the nation's Treasury. Originally, the Treasury Department received 7.7 billion shares of Citigroup stock as part of government's TARP program. The Treasury Department still owns approximately 5.1 billion shares of Citigroup common stock and has announced that they expect to continue selling the remaining shares on the open market after a blackout period set by Citigroup related to its second quarter earnings release ends. US taxpayers will be pleased to know that the Citigroup stock average sale price of $4.03 represents a profit over the average purchase price of $3.25 from the government's purchase of Citigroup stock. The billion dollar profit for US taxpayers makes a small dent in an enormous deficit, but could quiet critics of the TARP loans to Citigroup.

The U.S. Department of the Treasury has released its monthly update on Build America Bonds, showing that $106 billion have been issued through May 31, 2010.  Build America Bonds are a form of a government bond in which issuers, like state and local governments, receive an interest-rate subsidy or tax credit that allows them to offer a better rate of return to investors who buy their bonds. The program, which started in 2009 under the Obama administration, has been very popular with bond investors with most Build America bond offerings oversubscribed. However, bond investors should note that Build America Bonds are not true Treasury securities. As such, bonds issued under this program are not guaranteed by the federal government if an issuer defaults on their bonds. Visit the Treasury Department website for more information on the Build America program.

Treasury Securities

The Treasury Department through their web site, TreasuryDirect, now offers Treasury Bills with terms of 4-weeks, 13-weeks, 26-weeks, and 52-weeks, Treasury Notes with terms of 2-years, 3-years, 5-years, 7-years and 10-years, as well as Treasury Bonds with terms of 30 years. Treasury securities can be purchased online with as little as $100.

Investors worried about inflation can purchase TIPS (Treasury Inflation Protected Securities) directly from the Treasury Department. TIPS pay interest semi-annually with a rate tied to the increase in the CPI-U inflation index. More information about TIPS securities.

Treasury Yields

US Treasury yields are lower than they were in the spring as the US economy has slowed down. The yield on the 10-year Treasury has fallen as low as 2.96% in July, which is the lowest yield for the benchmark Treasury security since April 2009. Yields on short-term Treasury bills remain near record lows. The 3-month T-Bill is yielding 0.17% and the one-year T-Bill is yielding 0.28%, offering investors very little interest income from their investment. Many economists are forecasting a steepening of the yield curve, which means that they expect long-term rates to increase more rapidly than short-term rates. If interest rates do increase, holders of Treasury securities and government bond funds could see a loss of value as their holdings and coupon rates are less attractive to investors. This is a major difference between Treasury securities and bank deposit products, like bank CDs and savings accounts, which do not lose value if interest rates increase. In general, the prices of shorter-term Treasuries are less interest-rate sensitive than longer-term Treasuries. Investors who check the maturity dates of Treasury securities they own or what is called the duration (average time to maturity) for their bond funds, can help gauge the level of interest-rate risk that may exist in their portfolios.

Current Treasury Yields and Yield Curve

Historical Treasury Yields

Rates on Series I Savings Bonds

The Treasury Department has lowered the fixed rate component of their Series I Savings Bonds from 0.30% to 0.20% on May 3, 2010. The new rate means that purchasers of Series I bonds will earn a return of 1.74% for the next six months. The Series I savings bond return is comprised of a fixed rate (currently 0.20%) that never changes and a variable rate (currently 1.54%) set by the rate of inflation for the preceding six months. Economists are expecting inflation to increase later in 2010 and into 2011, which could mean that holders of Series I bonds will continue to earn a higher rate than holders of corresponding short-term U.S. T-bills. For more information or to purchase US Savings Bonds online visit Savingsbonds.gov. Series I Bonds can be purchased directly in $50, $75, $100, $200, $500, $1,000, $5,000, and $10,000 denominations. The next date that the Treasury Department will reset the rates for newly purchased Series I Savings Bonds is November 1, 2010.

Rates on Series EE Savings Bonds

The Series EE Savings Bonds issued by the Treasury Department will earn a fixed rate of 1.40% for Series EE bonds, issued from May 2010 through November 2010. Series EE bonds issued from May 1997 through April 2005 continue to earn market-based interest rates set at 90% of the average 5-year Treasury securities yields for the preceding six months. Market-based rates are announced by the Treasury Department each May 1 and November 1 for the Series EE Savings Bond. A 3-month interest penalty applies to bonds redeemed before being held five years. The next date that the Treasury Department will reset the rate for newly purchased Series EE Savings Bonds is November 1, 2010.

Limitations on Savings Bond Purchases

The Treasury Department announced back in December 2007 that individual taxpayers will be limited to $5,000 in purchases for the Series I Bonds and $5,000 a year for the Series EE Bonds down from the previous limit of $30,000. Savers who use payroll plan deduction are advised to be careful to stay under the purchase limits.

Tax Advantages of Savings Bonds

United States savings bonds earn interest that is subject to federal income tax, but income from savings bonds does not have to be reported on state and local tax returns. The federal tax on a savings bond can be deferred until a bondholder redeems the bond. An additional tax benefit of savings bonds is that interest earnings may be excluded from federal income tax if the savings bonds is used to finance education (restrictions apply).

Rates on Older Savings Bonds

The Treasury Department has been issuing savings bonds since the 1930s as a way to finance government debt. Originally the bonds were sold at a discount to their maturity amount, but in the 1980s savings bonds were changed so that the bonds could interest past the face value of the bond up to a final maturity after which the bond ceases to earn any interest. Surprisingly, according to the Treasury Department, there is over $12 billion in outstanding US savings bonds which are no longer earning interest. If someone in your family owns an old savings bonds, check the issue date to ensure that it has not matured. Why? Because owners of these savings bonds could reinvest in a Treasury Department product like a Series EE Bond (1.20%), Series I Bond (3.36%), 90-day T-Bill (0.17%), 180-day T-Bill (0.22%), 2-year T-Note (0.62%), or a 5-year T-Bond (1.83%), instead of allowing the government to hold their funds interest-free. Savings bonds which have stopped earning interest include: Series E (Issued May 1941 to May 1978), Series H (Issued June 1952 to May 1978), Series HH (Issued January 1980 to May 1988), and all Series A,B,C,D,F,G,J,K bonds.

Posted 7/19/10