As the capital markets falter, savings bonds, the tortoises of the investment world, are leaving the haggard hares of stocks and corporate bonds panting by the roadside. The average savings bond portfolio is up 4% this year, and not one savings bond has ever decreased in value.

Though savings bonds don't offer rates of return competitive with those of equities in most markets, they do offer a safe haven for capital in this troubled investing milieu. Two savings bonds are currently available: the EE Bond and the I Bond. As the EE Bond is paying only 1.3% (fixed until maturity at 20 years), the I Bond is currently viewed as having the most potential, and is drawing increasing interest from investors.

Composite Rate

The interest rate on I Bonds has two parts: a fixed rate that is assigned at purchase for the life of the bond—this rate is reset for new purchases every six months—and the inflation rate, which is reset every six months for all i bonds, new and exisiting. The fixed rate on new purchases is currently 0.7%. The current inflation rate, based on changes in the consumer price index for urban consumers, is 4.94%. So the composite rate, or the sum of the fixed and variable rates, is 5.64%. These rates are available through April.

Many of your clients already own savings bonds. The average balance of savings bond statements created by my company, The Savings Bond Informer, for clients of financial planners who have purchased them over the years comes to more than $40,000; more than 11% of these statements have balances exceeding $100,000.

Purchase Rules

For clients who want to start buying I Bonds or add to their existing portfolios, here are some of the purchase rules:

• The minimum holding period for bonds purchased on or after Feb. 1, 2003 has been extended to 12 months.
• If a bond is cashed after one year but prior to five years, it is subject to a three-month interest penalty, based on the last three months of interest earned.
• The published interest rate for I bonds is the composite rate. This rate is only good for the first six months of the life of the bond. Because inflation moves up and down, the composite rate can move up or down every six months.
• Purchase limitations on I Bonds were tightened as of Jan. 1, 2008. Each calendar year, clients can buy up to $5,000 of paper I Bonds and $5,000 of book-entry I Bonds. Clients can buy the maximum allowable amount for each category, but that still limits them to just $10,000 per year.

If your clients are married and want to buy more, however, flip each spouse's name. They can now buy up to $20,000 of I Bonds—$10,000 with the husband listed first and $10,000 with the wife listed first.

Building Trust

Many of your clients may not be aware of the current advantages of i bonds. Now may be the time to discuss them with clients who are interested in capital preservation but unaware of these bonds' features.

Even though you stand to earn no money from your clients' purchase of savings bonds, they will appreciate your service in explaining the advantages—and disadvantages—of adding them to their portfolios in today's market. After all, many clients burned by the fallen stock market are nervous about further losses and they are looking for safe places to put their money while getting a modest return.

Assurances that you're on their side and seeking advantageous options for them, regardless of your own compensation, build credibility and trust. One advantage that might pique clients' interest is that interest earned on savings bonds is subject to no state or local taxation. Also, the reporting of interest income for federal tax purposes can be deferred for up to 30 years.

Naturally, clients will want to take a hard look at returns. In 2008, rates on new purchases of I Bonds averaged 5.24%. So the current composite rate of 5.64% seems like a great deal. Is it still? This rate is in effect for six months on I Bonds purchased from November 2008 through April 2009. At that point the rate will reset. It's attractive compared with many other conservative investment options.

But for new I Bonds purchased during this period, the element of the rate that's fixed, 0.7%, is the second lowest in the instrument's history. It's the inflation rate that makes the current composite rate attractive.

Protected

I Bonds are protected from negative accrual, so they will never decrease in value. However, deflation could bring about a period of zero accrual because falling prices, of course, mean the absence of inflation. Yet even in this scenario, invested capital would be preserved, as there would be no inflation to eat away at it.