(Reuters) - As the times and technology advance, once-essential parts of our lives turn into pop cultural relics, from transistor radios to cell phones the girth of six-inch subs.
Now add the once ubiquitous paper U.S. savings bond, which will no longer be sold as of Sunday, January 1. That’s enough for some folks to make a pre-New Year’s Eve dash to the bank or credit union.
Some people may be racing for traditional Series EE bonds, so they can show their grandchildren what they look like. But for more people, it’s a chance to amass some high-yield inflation-proof Series I Savings bonds.
Here’s why: While you can buy $10,000 in I bonds today - $5,000 each in paper and electronic form — you can only buy half that much come New Year’s Day, when paper bonds go the way of the dodo. (Electronic bonds will remain available through TreasuryDirect.gov.)
True, paper bonds have a rich history that ties in to American patriotism and gift giving in families.
“The savings bond is an old product that’s been around forever, that grandparents bought for their grandkids to put in college funds — so it makes a big splash when you discontinue an investment option people are used to,” says Charles L. Sizemore, principal of Sizemore Capital Management in Dallas, Texas and author of the Sizemore Investment Letter.
But with I bonds (which have only been around since Bill Clinton’s presidency), some say that the rush is more about taking advantage of rates that make them a bulwark against inflation.
“It’s a great opportunity to buy I bonds,” says Julie Murphy Casserly, principal of JMC Wealth Management in Chicago. “Just don’t over expose yourself. So many people are chasing the bond market and you have to look at the big picture, and how bonds fit into your personal circumstances.”
In a world where risk-free investments are hard to find, I savings bonds are tied to the consumer price index and are currently yielding an annual rate of 3.06 percent. That rate changes every six months, but is high when compared to just about any other safe investment.
And unlike Treasury Inflation Protected Securities (TIPS), I bonds are not allowed to have a negative yield. So in a worst-case scenario, if recession and even deflation hit, and if there’s a race to safety that puts other Treasuries in a negative yield situation, investors would not lose money in an I bond. (There are penalties if you cash them in before you’ve held them for five years.)
I bonds are especially popular because they combine two payment rates: a fixed rate that lasts as long as the bond does, and an inflation rate adjusted twice annually and based on the Consumer Price Index for All Urban Consumers (CPI-U).
Together, the fixed and inflation rates create the I bond’s composite rate, which has ranged between its mathematical rock bottom (0 percent, May 2009) and 7.49 percent (May 2000), and sits today at 3.06 percent.
While returns on that lower end of the spectrum may look downright anemic, they beat the sort of double-digit losses that have dogged other investment sectors from real estate to the stock market. Should the economy strengthen and inflation come roaring back, the I bond investor would be protected; yields would rise along with inflation rates; albeit with a six-month delay.
Though new purchase limits take effect next week, “there are different ways to skin this cat,” Sizemore says. “If you want inflation protection, the I bond is a great investment. But there’s also the TIPS bond fund, which allows you to reach the same objective — inflation-adjusted bond returns.”
Like I bonds, TIPS pay a predetermined yield while adjusting the value of the bond’s principal to preserve purchasing power.
You can buy them through TreasuryDirect.gov or through a broker, and they essentially work much like I bonds. There are also several mutual funds that focus on TIPS.
But TIPS have drawbacks that I bonds don’t. The current yield on a five-year TIPS bond fund is negative 0.92 percent. What’s more, I bonds grow tax-deferred, while TIPS get taxed yearly for interest and inflation adjustments.
As for other ways to get around the new I bond limits, “you could put bonds in the name of a trust, and if the trust has its own tax identification number, it qualifies for additional Series I bonds,” says Travis W. Freeman, a certified financial planner with Four Seasons Wealth Management in Creve Coeur, Missouri. And if you own a business — a C corp, S corp or an LLC — those could qualify for additional bonds as well.
All told, a husband and wife could buy a combined $50,000 in Series I bonds if they have two trusts and a business to work with and they act fast, Freeman says. Though that changes to $25,000 in 2012, that still leaves plenty of room for such investors to buy bonds.
“The bigger question is the appropriateness of I bonds” in a portfolio, Freeman says. Because of the 0 percent fixed rate, which isn’t scheduled to go up any time soon, “you’re on the investment treadmill, working very hard but staying in the same place. It’s great for principal protection, but not for growth.”
For that reason, many financial advisers recommend using caution before going on any I bond frenzy. If you don’t own any bonds, some post-holiday purchasing may be in order. But it’s another thing to sink large chunks of cash into paper bonds just because they’re going away.
Typically, I bond purchases to take advantage of 2011’s $10,000 limit will make sense for two groups of people: those who need a place to stash money safely for up to five years, and retirees looking for principal protection to keep pace with rising costs in food and health care.
Freeman says that if you divide retiree portfolios into three “buckets” — one each for short-term, mid-term and long-term funds — I bonds could compose up to 20 percent of the middle bucket.
The Treasury Department states that it’s lowering the limits because U.S. bonds are meant for smaller investors. A $60,000 annual limit applied between 2003 and 2007 for I and EE bonds.
Meanwhile, there are also other ways to indulge in bond nostalgia that won’t cost you a dime.
The U.S. Treasury has mounted an interactive timeline, “The History of U.S. Savings Bonds,” at the TreasuryDirect website. It includes War Bonds posters, bond specimens bearing the likenesses of President Franklin D. Roosevelt and Helen Keller — and of course, specimens of the first Series I bonds, issued in 1998.
The author is a Reuters contributor. The opinions expressed are his own.
Editing by Jilian Mincer and Linda Stern