Some nearly risk-free places to put your money

Staying Ahead

March 18, 2001|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

YOU'VE SEEN your last one-year Treasury bill. The government isn't selling them anymore. One-year bills won't come back as long as the national debt keeps going down.

The change was announced on Jan. 31, although you might not have heard about it. The last auction of one-year bills was held Feb. 27.

The Treasury will still be publishing a one-year rate, called a "constant maturity rate." But instead of being a real rate, it will be inferred from other rates. Investors can use it to measure the risk-free rate in the marketplace. You'd expect a one-year investment to pay more than the Treasury rate.

The government will also use the constant maturity rate as a benchmark for its variable-rate loans. For example, it will establish what students pay for subsidized student loans. So you'll see references to the one-year rate, even though that bill doesn't exist anymore.

Any one-year T-bills you currently own are good until they mature. But after that, you'll have to choose another maturity - or another investment.

Short-term investors still can l get three-month and six-month Treasury bills. That's the most likely place for today's one-year investors to move. You get the government guarantee plus frequent access to your money. Right now, three-month bills yield 4.76 percent.

Those who won't need their money for a while might consider two-year Treasury notes. They're yielding 4.47 percent - just a hair less than you'd get from short-term bills.

Usually, the longer-term notes yield more. But if short-term interest rates continue to fall, you might do better with two-year notes over the entire term.

Treasuries offer a tax advantage, especially to investors in highly taxed states. You pay only federal tax on the interest, not state and local tax.

You can buy Treasuries directly from the government. Either open an account by Web at www.treasurydirect.gov or call Treasury Direct for the paper forms (800-722-2678). There's no fee unless your account is larger than $100,000. Then you pay $25 a year.

Treasuries are available through banks and stockbrokers, but there's no point to paying a commission when you can buy them free.

Still, many investors today are choosing to keep their savings somewhere else.

"The return on short-term bills has just not been high enough over the last year," says Steve Ames of Ames Fee-Only Financial Planning in Annapolis.

"There are so many alternatives ... that ending the one-year Treasury bill is a non-event," says Kenneth Hoffman, a financial consultant with Merrill Lynch & Co. Inc. in New York. Options include bank certificates of deposit, money market funds and other government securities.

Ready cash earns the most today in money market mutual funds, available at mutual fund groups and brokerage firms. Taxable funds currently yield an average 5.16 percent, compared with just 1 percent to 2 percent in bank savings accounts. Taxable funds that invest in insured government securities yield 5.08 percent.

Money funds are as liquid as checking accounts. You can take out cash whenever you want, without penalty, and even write checks against the account. Unlike banks, however, funds generally require that the check be for $250 or more (a few allow smaller amounts).

Top-bracket investors should look at tax-exempt money funds, currently yielding about 3 percent. They net even more than you'd get from three-month Treasuries, after tax.

To check the latest bank rates, see www.bankrate.com.

For money fund rates, see www.ibcdata.com.

For longer-term savings, Ames has been using various types of bond mutual funds. "The past year has been the best year we've had in the bond market for quite a while," he says. Medium-term bond funds currently yield about 5.54 percent in dividends, according to Lipper, a firm that tracks fund returns.

But bond-fund returns aren't guaranteed the way Treasury securities are. When rates fall, bond funds earn capital gains. In the past 12 months, their total return has risen an average 11.6 percent, Lipper reports. When interest rates rise, however, you'll take a capital loss.

For guaranteed returns, individuals often choose bank certificates of deposit. You can still get one-year CDs, at an average 5.15 percent. Bankrate.com lists some high-rate CDs at 5.75 percent, from banks with high safety-and-soundness ratings.

But beware so-called "one-year callable" CDs sold by some stockbrokers and planners. They apparently yield higher rates than you can get from a bank. But without your knowing it, these CDs may take 15 years or 20 years to mature. Callable CDs can be sold after a year through brokers, but usually at a loss.

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