Scott Burns, who writes a financial column in the Dallas Morning News, had a column yesterday about I-Bonds. The link is
www.scottburns.com, but it requires registration, so here is the text from the column:
Bond has points in its favor
09:08 PM CDT on Saturday, August 30, 2003
By SCOTT BURNS / The Dallas Morning News
One of the most interesting secure investments available today is the I Savings Bond, the inflation-protected security offered by the U.S. Treasury. Currently, these bonds yield 4.66 percent.
Yes, you read that right: 4.66 percent, tax-deferred.
If you visit the Treasury Department Web site that provides information on traditional savings bonds, conventional Treasury bills and notes, and Treasury Inflation Protected Securities, you'll find that EE Savings Bonds the ones that aren't inflation-protected are currently yielding 2.66 percent.
That's quite a difference.
Indeed, when you search the fixed-income markets, the I Savings Bond is a low-hassle slam-dunk compared with most alternatives. The only real limitation on these securities is that an individual can't buy more than $30,000 a year, a limit most people won't find too vexing.
The fine print
Here are the basics on the security. First, you can buy it online, without expense, by establishing a Treasury Direct account. Then you can make direct transfers from your bank account to purchase the securities.
The yield on these bonds changes every six months, in May and November. The yield consists of two pieces, a fixed rate that remains the same for the life of the bond, plus an inflation adjustment. The current rate of 4.66 percent (annualized) is based on a fixed rate of 1.1 percent plus 3.54 percent for inflation.
Those who buy before Nov. 1 will receive 1.1 percent plus inflation adjustments for the life of the bond. Those who buy in any six-month period after that will receive the fixed rate at that time, plus the inflation rate for the life of the bond.
The interest and inflation adjustment you receive compounds semi-annually. It is tax-deferred until you redeem the bond.
Although your long-term yield will not be 4.66 percent it could be higher or lower you have the assurance that your yield will be greater than the rate of inflation by 1.1 percent if you buy before November. You won't be losing purchasing power. It's about the same yield you would get buying a five-year TIPS, whose yield is currently taxable.
Needless to say, this yield blows away most bank CDs, which are currently taxable. It also blows away most conventional Treasury obligations according to Bloomberg.com, the yield on a 10-year Treasury note was recently about 4.4 percent, lower than the tax-deferred yield on the I Savings Bond.
The competition
Can anything compete?
Not really. If you search the universe of fixed-rate, tax-deferred annuities, most are offering yields under 4 percent.
Worse, to get that yield, you have to subject yourself to early withdrawal penalties that are significantly larger than the early redemption penalty for an I Savings Bond any bond redeemed before five years will lose three months of accrued interest.
In addition, although fixed-rate, tax-deferred annuities are relatively strong investments, the credit quality of insurance companies varies, and none is as secure as the U.S. Treasury.
As you might expect, using a variable annuity to invest in intermediate-term government mutual fund sub-accounts is a non-starter due to the total expense average of 1.97 percent a year.
Finally, we could also invest in TIPS, directly or through a mutual fund. In the current market, these securities are priced to yield from 1.19 percent plus inflation (five-year notes) to 2.68 percent plus inflation (30-year notes) so they will provide a greater real return.
Drawbacks
Unfortunately, the yield isn't tax-deferred unless you buy them in a tax-deferred account. If you buy them in a taxable account, you'll be taxed on the calculated return (real return plus inflation), but the only cash you'll receive will be the real return. Do the math you could end up owing more taxes than you received in cash.
For investors seeking peace and tranquility as well as yield, TIPS have another disadvantage. They may be inflation-protected, but they are just as vulnerable to dramatic interest rate shifts as conventional fixed-income securities.
Mutual funds that specialize in inflation-protected securities have taken a beating this summer, as have all fixed-income funds.
With one caveat, which I'll discuss Tuesday, I Savings Bonds make a really good, and secure, investing choice.
Tuesday: Safe from inflation, not safe from taxes.
