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US To Offer Bonds Indexed to CPI

July 8, 1998

WASHINGTON (AP) _ Average Americans soon will get an investment opportunity now enjoyed primarily by pension funds, insurance companies and other institutional investors: government-guaranteed securities protected from inflation.

Starting Sept. 1, the Treasury Department will sell savings bonds indexed to the Consumer Price Index in denominations as small as $50, department officials, speaking on condition of anonymity, said Tuesday.

Vice President Al Gore and Treasury Secretary Robert Rubin are scheduled to reveal the details of 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 bonds since 1980.

``They will provide people with guaranteed real returns,″ said a senior Treasury official. ``They’re perfect to give to your kids for their college educations.″

In a change from the familiar Series EE bonds, which picture founding fathers such as George Washington, John Adams and Thomas Jefferson, the I-bonds will depict more contemporary American heroes such as Martin Luther King Jr. and Albert Einstein.

Sale of the new bonds will fulfill a re-election campaign promise of President Clinton’s 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 U.S. savings bonds, sold through banks and savings institutions. Seven million Americans 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-adjusted 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, 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 well-behaved lately. 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 the among the best times to buy an inflation-indexed security.

``The time to buy life insurance is when you’re healthy ... and the time to buy inflation insurance is when the sun is shining,″ the senior Treasury official said.

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.″

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