I-Bonds Finally Get Some Respect - now is the time for long term investment - Brief Article

Kiplinger's Personal Finance Magazine, May, 2001 by Melynda Dovel Wilcox

INVESTING Inflation-indexed savings bonds are paying a big INTEREST-RATE PREMIUM. If you act now, you can lock it in for 30 years.

RODELL Anderson of Gaithersburg, Md., takes some ribbing from his more risk-prone buddies about buying savings bonds. But as tech stocks continue to tumble, Anderson may laugh last.

Anderson has recently been loading up on series I savings bonds, which pay a guaranteed rate of return over and above the inflation rate. Bonds purchased before May 1 will earn 3.4% plus the rate of inflation for the entire 30-year life of the bond. That adds up to 6.49%--1.5 percentage points higher than rates on comparable marketable Treasury securities.

Normally, savings bonds pay 0.3 to 0.5 percentage point less than the going market rate for Treasuries because of their built-in tax advantages: Not only are earnings free from state and local income taxes, but there's also no federal income tax due until you cash in the bonds. But because savings-bond rates are adjusted only twice a year, the current I-bond rate, set last November, doesn't reflect recent declines in bond yields.

John Brynjolfsson, manager of Pimco Real Return Bond fund and a leading expert on inflation bonds, anticipates that the fixed rate will be cut significantly on May 1, leaving investors with a short window to lock in the higher rate.

Keep in mind that there's a $30,000-per-person annual limit on 1-bond purchases. You can buy the bonds online with a credit card, but for security reasons, there's also a $1,000 limit per transaction (www .savingsbonds.gov).