Canadians flock to unintended bonus rate on savings bonds
CANADIANS have been flocking to safety after the stock market slide of the past two weeks. Savings bonds, the safest of investments, went on sale this week, and they were sold out in record time. And because of a mistake by the government of Canada, interest rates on the Canada Savings Bonds are higher than they should be, 9 percent. The reason is that advertising fliers and other material was already printed touting the bonds at 9 percent. It seemed a sound rate on Thursday, Oct. 15, when it was announced. But on Monday and Tuesday of the following week, interest rates dropped.
In an effort to cut off rich investors who might buy the bonds quickly, the limit on the value of bonds one person could buy was reduced from $75,000 to $20,000. ``I'm loading up on the limit,'' said one Toronto banker not usually given to such risk-free investments. ``What better place to park your money until this [the stock market volatility] blows over.''
The minister of finance, Michael Wilson, said he would lower the limit on purchases on savings bonds but not the interest rate. ``We have a rate that is established and we want to ensure that it is available for small investors,'' Mr. Wilson said. The last time the government was caught paying more interest than it wanted to was in 1981. But then there was a longer lead time, and the interest rate for October sales was announced in September. The rate was 19.5 percent. Interest rates had fallen since September, and that issue was sold out quickly.
``Canada, Your Bonds are Here,'' read the headline in an advertisement sent out in Canadian newspapers this week. It was pretty effective advertising. Across the country, Canadians lined up at bank counters to buy Canada Savings Bonds. ``Compared with the first day of sales last year, the current sales are roughly three times what they were,'' said Rick Ayer, assistant manager of the main branch of the Royal Bank of Canada in Halifax, Nova Scotia.
Banks and other financial institutions - trust companies and brokers - were a bit overzealous in their efforts to collect the money for the savings bonds. The Bank of Canada, Canada's central bank, had to tell financial institutions to stop making people pay for the bonds when they ordered them.
Since the bonds don't pay interest until Nov. 2, the banks and others would collect interest on the hundreds of million of dollars resting inactive for one week. The Bank of Canada sent out a stern note to financial institutions telling them not to collect for the bonds until Nov. 2 or later.
Brokerage houses report that many of their customers, hard hit by the fall in the value of stocks, have also been rushing to the safety of the government-backed bonds. ``Most everybody I call will buy them,'' says Susan Roberts, a broker at Dominion Securities in Toronto. ``If they have any cash in their accounts, they are all buying the limit.''
Sales of the savings bonds were over quickly. When the government figures that it has raised enough money - usually $10 billion to $12 billion - it ends sales, but must give 24 hours' notice. This week, Finance Minister Wilson gave two days' notice that the government would be closing the wicket as of today.
``I believe the two-day notice provides potential purchasers with ample notification,'' Wilson said.