Press Center

 STATEMENT OF TREASURY SECRETARY ROBERT E. RUBIN INFLATION INDEXED BONDS PRESS CONFERENCE


5/16/1996

Helping the economy and raising incomes requires increasing productivity, and the saving rate is central to that objective. The initiative we are announcing today has the potential of raising our national saving rate as well as reducing the cost of capital to the federal government. Today we are announcing our intention to issue securities that will offer investors protection against inflation. Americans' retirement savings in their pension plans or their own IRAs can have inflation protection, which can help ensure their retirement security.

The Treasury Department intends to offer inflation protection bonds as part of our ongoing program of debt finance. Each year the value of the security will keep pace with inflation. The minimum denomination we propose is $1,000 -- well within the reach of many savers. Individuals can buy them from brokers, directly from the Treasury department through TREASURY DIRECT, and through mutual funds and other intermediaries. Once the program is established, we expect to add inflation protection securities to the savings bond program as well.

One type of indexed bond we are considering would work this way: Invest $1,000, for example, on January 1st, and if inflation is 3 percent over the year, the security will be valued at $1,030 at the end of the year. Let's say the interest or coupon rate is also 3 percent. At that point, the security will be paying 3 percent interest on the higher value. And that will continue on through maturity. We're looking at 10-year or 30-year maturities. If someone bought a $1,000 10-year security for their child's college education, and inflation averaged 3 percent, they would receive almost $1,350 back from the Treasury, and the security would have been paying interest for a decade. If inflation is less, the payout will be lower, and if inflation is higher, the payout will be higher.

We are also considering two other structures -- a zero-coupon inflation-protection bond, and an inflation-protection bond that would include periodic payments of interest and principal. Further details on these are in the Advanced Notice we are releasing.

We think the kinds of investors who will be most interested in these securities will be individual Americans saving for their retirement or for other long term purposes, including their children's education. In addition, financial institutions such as mutual funds, insurance companies and pension funds that help individuals save should be interested in these securities.

We believe these bonds will offer savers value-added in the form of protection against inflation, plus a real rate of return backed by the full faith and credit of the United States, and in return for offering that value-added, over time the cost of financing to the federal government will be lower than it otherwise would be.

Our plans are at an early stage, and I cannot tell you today precisely when the first quarterly auction could occur. As someone with extensive experience in securities matters, I know that bringing a new product to market takes time and it doesn't happen overnight. But I believe that in time this will become a well-used program that Americans will value as a savings vehicle for retirement, education and other long-term needs, and as a consequence the markets in these securities will grow in depth and breadth.

The Treasury Department has through its history focused on the most cost-effective ways to finance the federal debt. If you recall, in 1993 Treasury changed the maturity mix of government securities, something that was initially looked on with some skepticism, but which since has won considerable praise and is saving the taxpayers $7 billion. And today, we are announcing the intention to issue inflation protected bonds as a further step in this direction, as well as a step we believe can help promote savings in the country.

There are a number of decisions which must be made before the first securities are issued. One of the issues to be resolved is what inflation index to use. At the moment, the four we are examining most closely are the Consumer Price Index for Urban areas, the Core CPI and the Employment Cost Index, all calculated by the Bureau of Labor Statistics at the Labor Department, and the GDP deflator, calculated by the Bureau of Economic Analysis at the Commerce Department.

We are asking in the Federal Register for public comments on the proposal. In addition, we want to go out and talk with investors and dealers who may have an interest in these securities. Accordingly, we plan to hold a series of investor meetings in Washington, New York, Chicago, Boston, San Francisco, Tokyo and London this month and next to gather investor comments.

This is a common sense approach to government and an excellent example of government reinvention -- protecting Americans from inflation with an innovative investment method, and saving them money as taxpayers by holding down borrowing costs.

Thank you.

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