SAVINGS BONDS BECOME A TOP INVESTMENT

With yields on money-market funds and certificates of deposits falling through the floor, many disgruntled investors are hungry for safe alternatives.

Double-digit yields are ancient history, and many individuals are hesitant to take on a little more risk with their money. This results in many investors getting re-acquainted with Treasury Department U.S. savings bonds, which just happen to be one of the top safe interest-producing investments around.

Treasury Department officials reported that savings bond sales in July topped $1.13 billion.

"This marks the fifth straight month that savings bond sales have topped the billion-dollar mark," said Mike McKinney of the Treasury Department's savings bonds division in St. Louis. "This was a 47 percent increase over the same month a year ago."

McKinney said bond sales had averaged more than a billion dollars a month since January, with $7.2 billion for the first seven months of the year."

"Dollar sales are up," he said.

McKinney attributed the increase in sales to two primary reasons.

"The savings bonds market interest rates change every six months," he said. "Currently the rate is 5.58 percent.

"But there is an upside to this," he said. "If you keep the savings bond at least five years you're guaranteed 6 percent interest regardless of the market rate. And, if the market rate takes a jump, bondholders will receive that, too."

The savings bonds, however, earn interest on a fixed, graduated scale, starting at 4.16 percent if the bonds are cashed in after six months. Bonds cashed after a year draw 4.27 percent.

"The rate goes up about a half percent a year until it reaches the market rate," said McKinney. "Once bonds are held five years, the minimum rate is 6 percent."

Bonds issued with the 6 percent interim rate have an initial term of a dozen years for full maturity, which is double the cost of the original bond.

"If you buy a $100 bond, it will cost you $50," said McKinney. "After 12 years the bond will reach maturity and be worth $100. After maturity, the bonds will continue to draw interest for a total of 30 years."

Another plus is the fact that funds used to purchase the bonds are tax deferred.

"You don't pay interest until the bonds are cashed in," he said, explaining that "when you take a look at five-year CD rates, money-market rates and rates being paid on bank interest accounts, savings bonds look pretty good."

There is also an educational tax break on EE bonds. The interest rates on bonds purchased after January 1990 may be excluded from federal income tax if the owner uses the income to pay eligible educational expenses for himself, spouse or dependent child.

"There are some limitations concerning the education tax breaks," cautioned McKinney. "Investors should read savings bond division brochure SBD-2017, or inquire about the education breaks before making an investment decision for this purpose."

The investment in savings bonds is also a no-risk one, he said.

"There's no question about it, savings bonds provide the investor with the best of two worlds," he said. "Savers are protected against decline, and on the upside, if interest rates do change for the better, the bonds' market base will go up."

"Savings bonds are as safe as you can find," he said. "And the yield is very attractive for something that is perfectly safe."

Acquiring savings bonds is simple, said McKinney.

The Series EE bonds are available for purchase at or through most financial institutions and through payroll savings plans offered by many employers.

"Applications for savings bonds are available at most banks," he said. "The applications can be forwarded to the closest federal reserve bank St. Louis or Kansas City. The bank will mail the bonds direct to the customer."

U.S. savings bonds are aimed at the small saver, said McKinney.

"The largest bond available is $10,000," said McKinney. "The smallest amount is $25."

He said investors are limited to $15,000 each year in bonds.

The value of U.S. savings bonds held by investors has reached an all-time high of more than $145 billion, compared to $132 billion a year ago.