U.S. savings bonds seen making a comeback

Quick: What’s an investment that is risk-free, guarantees your money back and currently offers a higher return than the Standard & Poor's 500 stock index?

If you didn’t guess U.S. savings bonds, don’t feel bad. Many people think of them as old-fashioned gifts given by grandparents for college funds, not “sexy” investments like real estate or global mutual funds. But now that the rate of inflation is rising, they’re looking especially enticing now.

On Nov. 1, the government boosted the yield on Series I, inflation-adjusted savings bonds to 6.73 percent through April 2006. (The same bonds paid 4.8 percent over the most recent six-month period). So if you buy a Series I bond before May 1, you’ll earn interest at a rate that is twice the average yield nationwide on 1-year bank certificates of deposit (CDs), and around 2 percentage points above the average yield nationwide on 5-year CDs, according to Bankrate.com, a Florida company that tracks interest rates.

The S&P 500 index is up about 4.6 percent so far this year.

So why invest in a risky stock that doesn’t even guarantee a return when you can get a better return that is backed by the U.S. Treasury, asked Tom Adams, author of Savings Bond Alert.

“There’s not a whole lot of other investments in the world today that give you that rate with safety and security. The investment is also tax-deferred, so you don’t have to report the interest until you cash in. It’s a win-win situation.”

You can buy them easily, either through your local bank or credit union, or online at the government’s TreasuryDirect Web site. And the minimum requirement is cheaper than most mutual funds: For paper Series I bonds, the minimum investment is $50; for electronic Series I bonds (bought online), the minimum is $25.

How Series I bonds work
Introduced in 1998, Series I bonds are recommended for individual investors since they’re designed to help your money keep pace with inflation, protecting the purchasing power of your dollars. So if you buy a $100 Series I bond today, you know you'll get at least that much when you cash it in plus a bit more, when you take into account the interest your bond earns.

(Another inflation-adjusted bond is the more traditional Series EE variety, whose interest is pegged to yields on Treasury notes, but financial experts say don’t bother with this type since it pays a paltry 3.2 percent, fixed for 20 years.)

Series I bonds really earn two rates of interest at the same time — one is a fixed rate of 1 percent that stays with your bond for its entire 30-year life, the other is a variable rate that changes every six months, based on the current rate of inflation.

To determine the inflation rate, the Treasury looks at the Consumer Price Index every March and September, evaluates the difference from the prior six months, uses that difference to set the I-bond’s rate for the next six months going forward, and announces the new rates on May 1 and November 1.  Since a huge jump in inflation occurred between March and September of this year, mainly because of soaring energy costs, the current variable got a big bump up to 5.70 percent.

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