Share this story
Close X
Switch to Desktop Site

The ultimate in safety: federal government securities

It's no coincidence that the words ''savings'' and ''safety'' are both related to the word ''safe.'' When it comes to the money they call savings, most people want at least a portion of it to be in the safest place they can find.

There is only one place that meets this demand for solid safety: the US government.

About these ads

The US government puts its ''full faith and credit'' behind the notes, bonds, bills, and certificates it sells.

And only the US government can print more money to make sure it is able to honor the interest and principal of these securities.

Since the government has to fund nearly a $200 billion annual deficit currently, there are plenty of new issues around. That size of deficit means yields on these issues are likely to remain high, and if inflation stays down, the real returns will also remain excellent.

Also, the reciprocal tax arrangement works here. Just as the federal government doesn't tax state and local securities, Treasury issues are free of state and local taxes, an important consideration if you live in a heavily taxed state or city.

Another nice thing about US Treasury securities: They come in a wide array of sizes that can be used by people of very modest means and the very wealthy.

At the bottom of the scale are US Savings Bonds, which can be bought at a local bank or through an employer's payroll deduction plan. These are not the laughingstock of savings vehicles they were a few years ago, but they are not the yield champions, either. Starting with $25 denominations, the bonds earn 7.5 percent interest, or 85 percent of the average yield on five-year Treasury securities, whichever is higher. This is the case as long as they are held at least five years, but if you have to have the money before then, you'll only get 4 to 7.25 percent, depending on how long they've been held.

Unless you are able to forecast interest rates, you should figure on holding all Treasury securities until they mature. With larger securities, it is possible to borrow against them or sell them in a secondary market before they mature, but you may not get as much as you paid for them, depending on what's happened to interest rates. Of course, for the same reason, you may also get more.

About these ads

Except for savings bonds, buying Treasury securities is a little more complicated than getting into some other investments. Treasury bills are sold weekly, in maturities of 3, 6, and 12 months. The minimum investment is $10,000. Notes are sold about every month, with a $5,000 minimum with maturities of 1 to 10 years, and bonds are sold irregularly and have maturities of over 10 years but usually cost a minimum of only $1,000. All of these are sold through auctions, listed in many newspapers.

There are two ways to take part in these auctions. You can put in a ''noncompetitive bid'' through a bank or broker, and pay up to $50 for the service, or you can submit the same type of bid yourself directly to the Treasury and save the service fee. One advantage in using a broker is that many people already have the money earning good interest in some sort of brokerage account, and it can be easily transferred when the security is purchased. Also, a good broker should notify you when promising auctions are about to come up. Still, if you prefer to make the deal yourself, you can send for a free booklet, ''Buying Treasury Securities at Federal Reserve Banks'' (Federal Reserve Bank of Richmond, Public Services Department, Box 27622, Richmond, Va. 23261).

One problem with noncompetitive bidding, however, is that you don't know exactly what interest rate you're getting until after the security is paid for; but except for periods of wildly fluctuating interest rates, you can be fairly sure of getting close to the latest rate published in your newspaper.

Another popular government investment comes from the various federal agencies that issue their own securities to raise money. But these, too, are guaranteed by the government. The agencies include the Federal National Mortgage Association, the Federal Farm Credit Bureau, and the Federal Home Loan Bank. But the most popular are certificates issued by the Government National Mortgage Association, or ''Ginnie Mae.'' Ginnie Mae uses the money it raises to support the ''secondary'' mortgage market, giving lenders a place to sell their pooled mortgages and obtain more money for future mortgages.

Someone buying a Ginnie Mae certificate is actually buying a share in this pool of mortgages, so they get repaid as the homeowners repay their mortgages. Of course, this also means that the monthly checks you get represent principal as well as interest, so it will take some discipline to be sure you're not spending both, unless you plan to.

A few years ago, several brokerages began buying Ginnie Mae pools and selling them to their customers in shares of at least $25,000. Today, many regional brokerages also sell Ginnie Mae shares in smaller packages, such as $15,000 or $ 20,000.

The maximum life of a Ginnie Mae pool is 30 years, but because many people sell their homes or pay off their mortgages well before that, yields on Ginnie Maes are commonly quoted on a 12-year basis. The result is that quoted yields are often higher than on US Treasury bonds and notes. The current rate is around 121/2 percent.

Although brokers recommend Ginnie Maes to a wide variety of clients, one of the best candidates for them are people who have retired or are about to do so. Retirees who are particularly conscious of cash flow on a monthly basis to tie in with their social security and pension checks will find these securities useful.

Financial planners caution, however, that Ginnie Maes should be only one part of a diversified income portfolio. If the monthly payments drop suddenly, there should be something else to take up the slack.

Follow Stories Like This
Get the Monitor stories you care about delivered to your inbox.