I bonds: an investor's hedge against inflation
As the US economy grows, so do concerns about inflation. Last month, fourth-quarter gross domestic product (GDP) figures were revised upward to a sizzling annual rate of 6.9 percent. New home and car sales remain robust. Oil prices continue to climb.
Little wonder, then, that Federal Reserve Board Chairman Alan Greenspan has said the Fed will take whatever steps are necessary to choke off any threat of inflation.
So far, the annual inflation rate remains in the 2 percent to 2.5 percent range. In large part, productivity gains continue to absorb wage and price spikes.
Yet, what should an investor do if inflation does suddenly pop through the economic thickets - putting downward pressure on corporate profits, and both stock and bond holdings?
Consider buying Treasury I bonds, issued by the US Government. I bonds are somewhat similar to traditional savings bonds, except that they are adjusted for inflation. The bonds, which are issued in denominations from $50 to $10,000, pay a guaranteed rate above inflation. The total interest rate, for now, is just under 7 percent If that doesn't sound appealing, check out the returns of stock mutual funds this year - many are in negative territory.
To buy I bonds, ring up the US Treasury on the Internet (www.publicdebt.treas.gov). Once you've gone to Treasury Direct on the Internet, click on "I bonds." You can fill out an application on the Web site.
If you don't have access to a computer, drop by any local bank and ask for a form.
I bonds can be held for up to 30 years. Federal taxes on interest earnings are not due until you redeem the bonds. Still, if you cash them in within the first five years, you will pay a penalty. You give up three months of interest.
Thousands of investors, through the Net, or local banks, have bought more than $700 million worth of I bonds since they were introduced about a year ago.
For more adventuresome folks with a little extra money, there is a second offering on inflation-adjusted bonds. They are called TIPS (treasury inflation-protected securities) and can also be purchased through Treasury Direct.
The bonds come in denominations of $1,000. They pay a slightly higher rate than I bonds, but you have to pay taxes on your earnings annually. Maturities for the bonds are either 10 years or 30 years.
Both TIPS and I bonds are not subject to state and local taxes.
But what's most assuring about both bond offerings, fixed-income experts agree, is that you are getting a return well above the inflation rate - at a time when inflation (real or imagined) is back in the news.
(c) Copyright 2000. The Christian Science Publishing Society