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Investing in Bonds

Back to the Future: The New Savings Bonds
by Rosemary Carlson

When I think about savings bonds, I think of stodgy, low-yielding investments that my parents and grandparents used to buy. They bought savings bonds, squirreled them away in their safe deposit boxes and saved them for a rainy day. Often, they sat in those safe deposit boxes until they matured in 30 years and were then cashed out to pay for our education or to supplement our parents or grandparents' retirement income. In those days, a "Depression" mentality still prevailed in our society. Everyone was afraid they would lose everything just as they did during the Great Depression. So the most popular investments were safe -- very safe. Bank passbook savings accounts, certificates of deposit and U.S. Savings Bonds. And some people still stuffed cash into mattresses or buried it in a jar in the back yard!

The baby boom generation, as well as Gen X and Y, certainly seems to have shaken that Depression mentality. Most of us have never lived through a Depression. Most of us have never lived through a World War. Some of us don't remember the Vietnam War and a few of us don't even remember the Gulf War! We have never had to use food or gasoline rationing coupons and we've never been in a community where only women and children lived since all the men were off at war. We struggle to live within our means because there is so much "stuff" out there that we want and that we think we need. It's difficult to say "No!" to ourselves. Right now, our personal savings rate in the U.S. was recently reported as negative. Compared to a society like Japan, our savings rate (or lack of it) is atrocious. The negative personal savings rate means that, not only are we not saving money, but also we're not even living within our means. We're borrowing, usually using credit cards, to consume. We're paying later for consumption now. Our grandmother's would fall away into a dead faint at the very thought!

Now what does all that have to do with the new savings bonds? In our New Economy of high-flying technology stocks and high-yielding junk bonds, savings bonds seem out of fashion. Or they did. Until recently. Due in part to the mutual fund industry and the availability of information, more and more of us invest in the stock market. We forget about bonds. We especially forget about savings bonds. Bonds are boring. But, is dumping all the money we want to save or invest in the stock market the smart thing to do? Some of us who lost one-third of the principal of our portfolios during the spring correction in the NASDAQ will say no! Bonds are back in style as the safe backbone of a portfolio. Believe it or not, the new I series Savings Bond can be a stable and lucrative part of that backbone.

The best-kept secret of the U.S. Treasury is the new Series I savings bond. These bonds, like the older Series E and Series H bonds, are backed by the full faith and credit of the U.S. Government. This means that they are virtually risk-free. There is little or no default risk. One of the problems of investing in savings bonds, or any fixed rate investment, in the past has been that inflation eroded the value of the bonds. No more! The Series I bond is inflation-indexed; in other words; if the inflation rate rises, Series I bonds will increase in value to compensate. Savings bonds no longer just pay a fixed rate of interest but a competitive market rate.


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