Series I Bonds outsell EE line

$66 million in new inflation-proof issue sold in November

Investing

January 04, 2000|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Savings bonds these days don't generate the same excitement of, say, Internet stocks, but the new inflation-proof bonds are attracting more attention.

Introduced in September 1998, the inflation-indexed savings bonds, or Series I Bonds, guarantee a rate of return above inflation. New I bonds are paying a rate of 6.98 percent, better than most money market accounts and certificates of deposit.

"It's a good return for a government security," said Tony Ristaino, a certified financial planner in Towson.

Investors apparently agree. About $66 million worth of I Bonds were snatched up in November, up from $30 million in October when the bonds were paying 5.05 percent.

The average purchase of I Bonds in November was $900, excluding those sales made through payroll deductions. In comparison, the average purchase of the more widely known Series EE Bonds, earning 5.19 percent, was $89.

"More and more people are learning about them. With the new rate, it shows that I Bonds keep their promise," said Peter Hollenbach, a spokesman for the Bureau of Public Debt. "The promise is you will be guaranteed a rate of return over and beyond inflation."

The rate on an I Bond is a combination of a fixed rate over the life of the 30-year bond and the inflation rate, which is adjusted May 1 and Nov. 1. The fixed rate was recently raised to 3.4 percent.

Besides the current favorable rate of return, I Bonds have added benefits shared by the Series EE. The bonds are backed by the U.S. government, you won't have to pay state and local taxes on the interest income, and you only have to pay federal taxes on the interest after you cash in the bonds.

There are limitations, too. Like other savings bonds, you must hold I Bonds for at least six months. Cash them in before five years and you also lose three months' worth of interest.

I Bonds are bought at face value. The minimum purchase is $50 and the maximum purchase is $30,000 each year per person.

The Series EE bonds are sold at half their face value. The minimum purchase is $25 and the maximum is $15,000 annually per person. The rate on Series EE bonds is tied to 5-year Treasury securities.

The tax advantages and returns competitive with CDs and money market accounts make savings bonds attractive to investors looking for a conservative place to park some of their money, said Daniel Pederson, president of the Savings Bond Informer Inc. in Detroit, which helps investors figure bond values.

The government has also made it easier to buy them.

Bonds traditionally have been bought at financial institutions and through payroll deductions at some companies. Now consumers can buy them through EasySaver, a program the government launched about a year ago that allows people to buy bonds through deductions from their bank account. (For an application, call 877-811-7283).

Beginning in November, investors also could buy savings bonds online with a credit card. About $1 million worth of bonds are now sold online a week, with I Bonds outselling Series Bonds by 2-to-1 on the Web.

While convenient, online purchases aren't for everyone, Pederson warned.

"Americans don't do a good job of paying off their credit cards," he said. If that's you, you could end up paying credit-card interest of 12 percent to 18 percent on a purchase of savings bonds earning 5 percent to 6 percent, he said.

Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between," said investors often forget that interest is earned on bonds only up until maturity. Investors are holding more than $6 billion worth of old bonds that are no longer earning interest, he said.

And he advises that if you cash in bonds before maturity, don't do it randomly because not all bonds are alike. Rather, cash in the worst performers and keep those with the maximum returns in your portfolio, he said.

For more information and tips on savings bonds, visit the government's Web site at www.savingsbonds.gov or Pederson's Web site at www.bondhelp.com. A sheet to keep record of your savings bonds is available free from the Savings Bonds Informer by calling 1-800-927-1901.

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