New Savings Bond Debuts

Grandmothers and uncles tucking U.S. savings bonds into birthday cards soon will be able protect the value of their gifts from being eroded by inflation.

Starting Sept. 1, the Treasury Department will sell savings bonds indexed to the Consumer Price Index in denominations as small as $50. They will be issued at face value and interest will be tax-deferred until they are cashed.

That will extend an opportunity to millions of small savers now enjoyed primarily by pension funds, insurance companies and other institutional investors.

Vice President Al Gore and Treasury Secretary Robert Rubin introduced the new savings bonds, dubbed I-bonds, in a ceremony Wednesday.

The bonds will be offered in eight denominations: $50, $75, $100, $200, $500, $1,000, $5,000 and $10,000. They'll be the first new type of savings bond since 1980.

"Now more than ever, Americans need to focus on saving for their children's college (education) and their own retirement," Gore said. "These bonds will make that much easier, and ensure that those savings will never be undercut by future inflation."

In a change from the familiar Series EE bonds, which picture founding fathers such as George Washington, John Adams and Thomas Jefferson, the Series I bonds will depict prominent Americans of the late 19th and 20th centuries.

Helen Keller will appear on the $50, Mexican-American activist Hector Garcia on the $75, Martin Luther King Jr. on the $100, Nez Perce Chief Joseph on the $200, Secretary of State and Gen. George Marshall on the $500, Albert Einstein on the $1,000, contralto Marian Anderson on the $5,000 and Sen. Spark Matsunaga of Hawaii on the $10,000.

"The design of this new security gave us a rare opportunity to recognize these distinguished individuals whose talent and dedication helped our nation make great strides in knowledge, the arts, civil rights and world peace," Rubin said.

Sale of the new bonds will fulfill President Clinton's 1996 re-election campaign promise to offer middle-class Americans new ways to save.

The administration began auctioning inflation-indexed Treasury securities, in minimum increments of $1,000, on Wall Street in January 1997. It has sold $50 billion in five-year and 10-year notes and 30-year bonds.

Though it's possible for individual investors to purchase auctioned securities, either directly from the government or through a broker, few do. Far more - 55 million - own savings bonds, sold through banks and savings institutions. Seven million savers buy savings bonds through payroll deduction plans.

The rules governing I-bonds will be similar to Series EE, with two notable exceptions.

First, Series EE bonds pay an interest-rate, currently 5.06 percent, based on the rate paid on auctioned five-year Treasury notes. I-bonds will pay a two-part interest rate.

The first part will be set in reference to auctioned five-year, inflation-ajusted Treasury notes. The second part, adjusted every six months, will be based on the increase in the Labor Department's Consumer Price Index for urban residents.

Second, while Series EE bonds are sold at half their face value (a $50 bond costs $25), I-bonds will be sold at their full face value.

As with the Series EE bonds, interest on I-bonds will be tax-deferred until they're cashed in and will be tax-exempt when used to pay for college tuition by taxpayers who meet income limits. Both types of bonds will incur a three-month interest penalty when held less than five years.

Demand for the inflation-indexed securities sold at auction has been less than it might have been because inflation has been so low. Consumer prices during the first five months of this year have risen at only a 1.5 percent annual rate.

But Treasury officials and some private experts argued that now might be among the best times to buy an inflation-indexed security.

Daniel J. Pederson, author of U.S. Savings Bonds: A Comprehensive Guide for Bond Owners and Financial Professionals, said whether I-bonds prove to be a good deal depends on the gap between base rate on the I-bond and the rate paid on regular Series EE bonds.

"It's tough to sell an inflation-protected bond amidst the lowest inflation we've had in three decades," Pederson said. "At the same time, if we look at the past history of inflation, this may look like a real good deal in five or eight years."

Written By Dave Skidmore