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US Treasury report: news on treasury bills, treasury notes and US savings bonds

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Yields on United States Treasury Securities as of December 9, 2011
Length As of November 1, 2011 As of December 1, 2011
5-year maturity 0.900.97
10-year maturity 2.012.11
20-year maturity2.732.82
30-year maturity2.993.12
Source: Federalreserve.gov

Treasury update: August 27, 2011

Congressional lawmakers continue to debate the Dodd-Frank Act both in session and out. Treasury Department officials have defended in hearings their ability to coordinate all the aspects incorporated in the Dodd-Frank Act, and issued public statements. Earlier this month, the House Appropriations Committee financial services subcommittee approved a 2012 appropriations bill, that curbs the funding for the Consumer Financial Protection Bureau (CFPB) created by the Dodd-Frank financial reform law.

The mortgage market is eyeing the Treasury Department closely for indications of how quickly Treasury will trim their holdings of government agency bonds. The Treasury Department proposed a broad plan earlier this year to dissolve the large mortgage companies Fannie Mae and Freddie Mac. The plan would give Congress three different options to convert back to private bankers the underwriting task that government-sponsored entities have largely taken over.

Instead of securitizing large pools of mortgages with government guarantees, the new plan would call for market-based lending based on qualifications and creditworthiness. The plan is expected to be phased in over five to seven years if approved. Mortgage rates could be affected if the Treasury Department begins to increase their liquidations of holdings in the future.

In an announcement that could affect millions of Americans, the Treasury Department announced that people receiving government benefits will have until March 1, 2013 to switch to direct deposit. In addition, anyone applying for benefits after May 1, 2011 will automatically be enrolled in direct deposit. The move to direct deposit, which may frustrate some senior citizens, is designed as a government cost-saver. But moving to a paperless system also has benefits for the environment in reduced energy and paper production.

TARP update on taxpayer bailout

The Treasury Department has now recovered close to 80% of the money distributed in the financial bailout to troubled banks in the U.S. Major banks such as Bank of America, Citigroup, Wells Fargo and JP Morgan Chase are in the clear, but a number of small banks are having trouble settling their account with the government. The last $20 billion left to collect may be the most difficult, as small community banks continue to be hurt by defaults on commercial and construction loans.

A closely-watch TARP recipient is Ally Financial Inc. The company filed for an IPO, slated for later this summer, that will allow the lender to repay the government. The holding company for FDIC-insured Ally Bank suffered enormous losses due to bad car loans made by the financing arm of General Motors. Savers who own Ally Bank CDs will be unaffected by the privatization of Ally Financial.

Despite the government's success in recovering TARP money, regulations on the compensation for executives from banks who received taxpayers assistance are still in place. Wilmington Trust Corp. had to revoke $2 million in recent payments made to their CEO because the payments exceeded those allowed by Treasury Department rules. Limits on executive compensation are a motivating factor for banks to repay their outstanding TARP loans.

Treasury yields

Short-term U.S. Treasury yields trickled higher after S&P issued credit rating warnings on U.S. Yields on the one-year T-bill dropped to as low as 0.04 percent this month, before jumping back to 0.18 percent. Forecasts call for Treasury yields to stay low through the summer as U.S. and European debt issues weigh heavy on global markets.

The breakout of Treasury yields directly impacts current mortgage rates. Rates on 15-year and 30-year fixed mortgages have pushed lower. On the other side of the equation, savers are still stuck with low rates for their bank CDs and savings accounts.

Investors have flooded the market for TIPS, pushing yields lower. The break-even rate, considered a gauge of inflation expectations, is now 2.18 percent on the 30-year TIPS and 2.03 percent on the 10-year TIPS. If inflation exceeds those marks, TIPS investors would come out ahead of investors holding regular Treasury bonds of the same length.

Current Treasury Yields and Yield Curve

Historical Treasury Yields

Treasury securities

The Treasury Department, through their website TreasuryDirect, now offers Treasury Bills with terms of 4, 13, 26, and 52 weeks, in addition the standard terms of two, three, five, seven, 10 and 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 with a minimum deposit as low as $100. TIPS pay interest semi-annually with a rate tied to the increase or decrease in the CPI-U inflation index. Commonly used as an inflation hedge, TIPS offer individual investors a way to earn what is referred to as a "real rate of return". This is the premium between the real yields TIPs pay and the rate of inflation.

CDs and money market accounts cannot guarantee against inflation risk, although they offer FDIC-insurance against loss of principal. In addition, the best CD rates are typically higher then the yields on corresponding TIPs. Mutual funds are available that invest in TIPS, although the price volatility of their fund can be greater for investors than if they held TIPS directly. 

Rates on Series I and Series EE savings bonds

Savers received a nice gift from the Treasury Department in the form of a healthy rate increase on Series I and Series EE bonds. The Consumer Price Index (CPI) increased at an annual rate of 4.6 percent for the period of time the Treasury Department tracks for their latest adjustment to the inflation component of the Series I rate. Even with the Treasury Department keeping the fixed-portion of the Series I return set at 0 percent, the cumulative earnings rate of 4.6 percent is a real treat for holders of the inflation bond.

If you bought the I-bond a few years ago when the fixed rate portion was as high as 3.6 percent, the next six months will offer rates not seen for some time. The Series I bond tracks inflation for investors, but if inflation is negative, holders of the bond will not lose money.

The Treasury Department also increased the rate offered on Series EE Savings Bonds to 1.10 percent from 0.60 percent. The Series EE bond now offers a rate that is competitive with short-term CDs, money market accounts and savings accounts.

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 five years.

Savings bonds can be purchased online 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, 2011. For more information or to purchase U.S. Savings Bonds online, visit savingsbonds.gov.

Rates on Series EE savings bonds

Rates have been reset by the Treasury Department on U.S. savings bonds. The Series EE Savings Bonds issued by the Treasury Department will now earn a fixed rate of 0.60 percent. Series EE bonds issued from May 1997 through April 2005 continue to earn market-based interest rates set at 90% of the average five-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 five years. The next date that the Treasury Department will reset the rate for newly purchased Series EE Savings Bonds is April 1, 2011.

Limitations on savings bonds

The Treasury Department announced 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. The previous limit was $30,000. Savers who are enrolled in payroll plans that deduct funds from every paycheck to purchase savings bonds need 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 interest 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 in the case of savings bonds 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. In the 1980s, savings bonds were changed so that the bonds could earn interest past the face value of the bond up to a final maturity date. After the final maturity date, the bonds cease to earn any interest. Surprisingly, according to the Treasury Department, there over $12 billion of outstanding US savings bonds exist that 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. Owners of an expired savings bonds can reinvest in a new Treasury bond that earns an investment return, 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 and K bonds. Those who grew up in the World War II-era were once one of the biggest purchasers of savings bonds, many of which were purchased to fund the education of their grandchildren. Today, savings bonds are a less popular investment since more sophisticated ways to save for college have emerged. Savings bond rates are now also lower than the best CD rates and savings account rates. But for patriotic Americans, savings bonds will always have an important place in their savings plans.

Last updated: August 27, 2011

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