SAVINGS BONDS IN PERSONAL INVESTMENT PROGRAMS (Discussion)

Abstract

WE ARE INDEBTED to Professor Burrell for this comprehensive study of savings bonds. His discussion of the legal aspects of ownership, probate, and inheritance tax status is particularly valuable. The present (but possibly temporary) superiority of savings bonds over other high-grade fixed income media with respect to yield leads one to agree with the conclusion that, except for investors in the upper tax brackets in a position to take advantage of the tax-free status of municipals, and those investors wishing higher short-term yields from institutional deposits, in most cases individuals would do well to confine their purchases of debt instruments to savings bonds, whichever one or combination of the four types seems most appropriate. However, with any substantial stiffening of interest rates such as might drive the yield on highgrade corporates to say 3.5 per cent and the rates paid on deposittype investments above 3 per cent, the relative position of the Savings Bond will be impaired. They had their greatest appeal when they yielded Y2 to 34 per cent above long-term Treasurys, '4 to Y2 per cent above long-term high-grade corporates, and 1 to 1X2 per cent above deposit yields. If the Treasury is again to rely heavily on this type of demonitized borrowing the spread between savings bond yields and alternative yields must be sufficient to give them a continuing bargain appeal. In the meantime the fact that the old E's can be held beyond the original 10-year maturity at a relatively high yield (3 per cent) gives them a special appealbut their advantage in this respect is diminishing. More emphasis might be given to the tax-free nature of the reserve accumulation in life insurance contracts, which goes far toward compensating for their low guarantied rate of compounding. This advantage of insurance accumulation has not been given the attention it deserves and it is heartening to find it singled out for special notice. A possibly minor point, in so far as comparative tax status is concerned, is the exemption of the interest on Treasury bonds