Savings Bonds start to look OK

No paying state or local taxes, plus yield competes with CDs

January 02, 2001|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

With the Nasdaq composite index posting its worst annual performance last year since its inception in 1971, investors might be looking for less risky places to put their money. They could even fall for U.S. Savings Bonds all over again.

"I think people will reassess their feelings about risk and their own time frames for their investment," said Michael Dougherty, an associate vice president of investment for A. G. Edwards & Sons Inc. in Baltimore.

"Depending on what their goals are, I think there are very valid reasons for some persons to be owners of U.S. Savings Bonds."

FOR THE RECORD - An article in Tuesday's Business section about U.S. Savings Bonds gave an incorrect total sales figure for the 52-week period ending November 2000. The correct figure was $5.73 billion. The Sun regrets the error.

Those reasons include principal that's guaranteed by the U.S. government, exemption from local and state taxes, the flexibility of buying in small denominations, and an interest rate that's competitive with most bank certificates of deposit. Bond owners pay federal taxes on the interest earned after they redeem the bonds.

Savings Bond sales have declined since 1993, when the government lowered the rate to 4 percent, down from a 10-year guarantee of 7.5 percent, and replaced it with a variable rate in 1995.

But the government's introduction of the I Series, an inflation-linked bond, in September 1998 has been a shot-in-the-arm for a savings product that began as a way to finance the war effort during World War II.

And in November 1998, it also started "EasySaver" - a plan that enables people to automatically debit their bank account for the purchase of bonds without having to walk into a bank or go online.

The government also offers the sale of Savings Bonds through payroll deduction. About 44,000 organizations - including many small businesses - participate in the program, according to a U.S. Treasury spokesman.

The I bond currently earns 6.49 percent. It consists of a fixed interest rate of 3.40 percent combined with the annual rate of inflation, which is based on the Consumer Price Index and adjusted every six months.

The EE-series bonds, which were issued on or after May 1, 1997, earn 90 percent of the average five-year U.S. Treasury securities yields for the preceding six months, or a rate of 5.54 percent

Couple the I-bond's higher rate with the U.S. Treasury's improved Web site for Savings Bonds sales and information, and it's no wonder that the better-performing I bond has grown in sales.

In November 1999, $66.6 million in I bonds were sold; last November, $195.1 million. Meanwhile, EE bond sales dropped 14 percent for the same month-over-month period to $272.2 million.

And for the 52-week period ending in November 2000, I bond sales accounted for 36 percent of the $2.05 billion in Savings Bonds sold during that period. Online sales accounted for 2 percent of sales in November.

"I believe there's going to be some cannibalization [of the EE bond as a result of the I bond], but not totally," said Daniel J. Pederson, author of the book "Savings Bonds: When to Hold, When to Fold and Everything In-between."

Rick J. Greiner, the Bureau of Public Debt's manager for the metropolitan Baltimore area, called the I bond "very safe and competitive," and pointed to their tax advantages.

"I think the [Series-I] bond really shines," said Greiner. "Here's a product that offers a real rate of return over and above inflation. It's especially appealing to older retired Americans ... their earnings will do 3.4 percent better than inflation."

There are limits to the amount of bonds consumers can buy. For the I bond, it's $30,000 a year per Social Security number. For the EE bonds, its $15,000 a year, with a face value of $30,000.

Bond owners have to hold them for six months before they can be redeemed, and there is a three-month loss-of-interest penalty if they're redeemed before five years.

"I think we'll see Savings Bonds rates continue to be in the 5 percent to 6.5 percent range. For the conservative end of your portfolio, I think Savings Bonds are an attractive option," said Pederson.

Savings bond tables

Redemption tables showing the value of Series E, Series EE and Series I U.S. Savings Bonds by year issued will appear in today's Business section.

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