10 BARRON’SMarch9,2 020
points, plus anadjustment in principal
valu e, based on the CPI.
To be sure, neither savings bond can be
traded, so there is no opportunity for a
capital gain(or loss). And to realize the
high yield of the EE series,you ha ve to
hang on for 20years. You can redeem ei-
ther type after 12 months, but ifyou do so
in less than five ye ars, there’s a penalty of
three months’ interest.
Still,thesebondsprovideaballastto
long-terminvestmentplanssuch as401(k)
retirementor5 29college-savingsaccounts.
Andtheycouldhelpyoungerinvestorsactu-
allyfollowthroughont hestandardadvice
toin vest inriskierequitiesforthelongterm.
As the work of Research Affiliates’Rob
Arnott and LillianWu shows, millennials
would do well to ha ve a lar ge slug of lo w-
risk, inflation-protected assets, in part to
hedge against some of life’s risks, such as
unemployment.
When life ’s vicissitudes hit, 401(k)s are
all too often cashed out, probablyat the
worst time—say, in a bear market during a
recession,when la yoffs are likely to take
place—and incur an early-withdrawal tax
penalty. A cushion of bondswould allow
one to stay the course in thestock market
through tough times. LikeTreasuries, sav-
ings bonds are exempt fromstate and local
income taxes, but are federally taxable.
Howeve r, the tax on savings bonds isde-
ferred until they are redeemed.
As for the top1%,their favorite tax-shel-
tered investments,municipal bonds, once
again areattracti ve,atl eastinr elati ve
terms, because their yields haven’tkept up
with the headlong plungeint hose onTrea-
suries. Ten-year top-grade mu nis were
yielding0.92%Fridaymorning,according
to Bloomberg, compared with0.75%ont he
10-yearTreasur y. Themuni yield is equiva-
lentto1 .46% on ataxable bond for an in-
vestor in the top federal tax bracket (37% ).
At the fi ve-year maturity, themuni
yielded0.63%, versus 0.57% for the com-
parableTreasur y, equi valent to a 1.0% tax-
able yield. Andat the long end, 30-year
munis paid 1.55%, compared with 1.32%
for the 30-yearTreasur y, a taxable-equiva-
lent 2. 46%.
Perhaps munis will reprice to reflect
their tax exemption, but for now that fea-
ture is free.Viewed anotherway, howeve r,
both classes of bonds yield less than the
loss of purchasing power from inflation.
Such is the plight of the rentier today. The
small saver is faring a bit better, for now
anyway.B
email:[email protected]
Thestandardprescriptionforthecurrent
crisisandotherassortedeconomicmala-
dies—ch eapmoneyandever-lowerinterest
rates—mig ht treatonlythesymptomsinthe
financialmarkets.Fortheunderlyingecon-
omy, theinflationarysideeffectsofthis
potioncouldbetoxic,asitwasinthe1970s.
T
his year is allabout the1%. Not
the wealthiest percentile of
Americans, but the meager yield
of less than1% that the coupon-
clip ping class has to settle for on the
benchmark 10-yearU.S. Treasury note.
But in a blowagainst investment inequal-
ity, the other 99% have the opportunity to
do su bstantially better than the top tier—
including a way to double their money,
guaranteedby Uncle Sam.
Don’t bother asking financialadvisors
about this opportunity because theydon’t
offer it.What’ smore,it’simpossible to
lose money on this investment(af ew as-
terisks excepted).
This too-good-to-be-true investment is
none other thanhumble U.S. savings
bonds,which yieldsubstantially more
than marketable Treasury securities.But
they’re of interest only to us hoi polloi be-
cause purchases are limited to $10,000 a
year. That still makes themvalu able to
investors and savers starting out—not as a
substitute foraccumulating realwealth in
the stock market but as a complement to
help smooth rough patches,such as the
one, you mig ht have noticed, thatwe’re
going through now.
Savings bonds come in twovarieties,
series EE and series I.Their stated interest
rates are trivial—0.10% and0.20%, re-
spectively. But both come with kickers that
makethem super deals.
For Series EE bonds, theTreasury
makes a one-timeadjustment to twice their
face valu e on the 20th anniversary of their
issue date, as theTreasuryDirect.gov web-
site explains.That means EE bonds yield
3.53%—more than 200 basis points(two
percentage points)above the 30-yearTrea-
surybond, which was trading late this
past week at 1.45%. To double your money
at the yield of a 10-yearTreasurywould
take about 100years.
As for the other type of savings bond:
The I stands for inflation.Its interest rate
is adjusted every six months to the CPI-U,
the consumer-price index for urbandwell-
ers, plus the initial 20 basis points,which
figures to anoverall yield of 2.22% through
April. That is higher thanTreasury infla-
tion-protected securities.The fi ve-year
TIPS offer anegativereal yield of 63 basis
Up&DownWallStreetContinued
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