Investor’s Business Daily compares Treasury securities

Tuesday, July 11th, 2006
Categorized as: Yesterday's News (old post archive)

Last Friday (July 7), Investor’s Business Daily included a look at Savings Bonds in Treasuries Offer More Than Security, by Donald Jay Korn.

The article encourages investors to consider Treasury securities and covers features of Treasury Notes, Treasury Inflation Protected Securities (TIPS), and Savings Bonds.

Conventional wisdom says TIPS should be held in a tax-deferred account – such as an IRA or 401K – because you have to pay tax on both the interest and the inflation gains, but you only receive the interest to pay the tax with.

But, as Korn rightly points out, “This tactic can backfire. Treasuries are normally exempt from state and local tax. When they’re withdrawn from a retirement account, their earnings lose that exemption. If you live in a high-tax state or city, you’ll pay a double or triple tax.”

In comparison with other Treasury securities, the main drawback to Savings Bonds, the article says, is the maximum annual purchase limit. I agree with that.

I have more trouble with the statement, “But I-bonds are not as liquid as traditional Treasuries or TIPS. You can’t cash them in for 12 months. And you can’t resell them on a secondary market.”

You can’t cash them during the first year, that’s true. But not being able to sell them on the secondary market isn’t an issue! After the first year, you can redeem them on any business day of the year without a brokerage fee or commission. When you sell marketable Treasury securities on the secondary market, you have to go through a broker, which makes them less liquid than Savings Bonds.

The article also includes a graph comparing the interest rates paid by the securities mentioned in the article. The bar for Series I bonds is too long – it should be 1.40%, not 2.41% (this is correct in the article, but not in the graph). The rate shown for TIPS doesn’t include the inflation component, so neither should the I bond rate.

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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

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June 1, 2010

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