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WSJ article: One Safe Haven With Attractive Yields

13 years ago

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Here's One Safe Haven With Attractive Yields

WSJournal October 28, 2008

Amid the flight to safety, yields on government securities have plummeted. But there's at least one safe haven that's still paying attractive yields: inflation-linked savings bond, or I Bonds. Starting next month, the yields on these bonds are expected to rise to nearly 5% for at least six months.

The increase in the I Bond's yield is due to the rise in inflation over the past six months, reflecting the summer's higher oil and commodity prices. Based on the change in the consumer-price index from March to September, the new annualized inflation adjustment will be 4.92%, up from the current yield of 4.84%. The overall rate could be higher if the Treasury decides to raise the fixed rate, currently 0%.

I Bond yields have two parts: a fixed rate that lasts for the 30-year life of the bond, and the inflation adjustment. For investors, the most important rate over the long term is the fixed one because it is constant for the life of the bond; the inflation adjustment, by contrast, changes twice a year, on May 1 and Nov. 1.

It's likely, though, that the Treasury Department will leave the fixed rate at zero since the I Bond's yields are already relatively attractive, says Tom Adams, author of the book "Savings Bond Advisor."

For now, savers can lock in close to 5% for at least a year, but only if they buy I Bonds before Nov. 1. If they do, they can get the current rate of 4.84% from October through the end of March 2009, plus the new rate of at least 4.92% for the following six months after that. After that, if inflation is lower, then the yields on I Bonds are likely to fall.

One strategy is to cash in the bonds after their one-year minimum holding period, suggests Mr. Adams. Although investors will pay a penalty of the most recent three months' interest if they sell within the first five years, they will still be earning 3.68% after that penalty if they hold the bonds for 12 months, he says.

Although the Treasury cut the investment limits on savings bonds to $5,000 per Social Security number from $30,000 in January, savers can sock away more by buying different types of bonds or by getting their spouse to buy bonds. Investors can buy up to $5,000 in paper I Bonds from their bank and $5,000 in electronic I Bonds through, for a total of $10,000 each calendar year.

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