TREASURIES: SMALL RISK, SPOTTY REWARDS
The Clinton Administration's new ''inflation-protection'' bonds should be the ultimate worry-free investment: The bonds, which will be available in $1,000 denominations in early 1997, have both the full backing of Uncle Sam and carry a return pegged to the consumer price index. First-time buyers at the Jan. 15 auction may be well rewarded: Wall Street dealers believe the Treasury Dept. will price the first batch of 10-year indexed bonds to yield between 6.5% and 6.8%. Investors could get a hefty real return of almost 4%, vs. the 3% real yield expected at later auctions.
Even that, though, may not offset the risks tied to these supposedly risk-free instruments. The biggest threat is if Congress decrees a full percentage point cut in the consumer price index. But Deputy Treasury Secretary Lawrence H. Summers promises ''the compensation on these bonds will not be subject to political manipulation.'' If Congress punts, the government gnomes who compile the CPI may well lower the rate a half-point on their own.
Yet indexed bonds are a good bet for risk-averse investors and may be a better choice than annuities or guaranteed income contracts in retirement portfolios, experts say. Buy directly from the Federal Reserve; indexed-bond mutual funds created by Dreyfus, Pimco Advisors, and others will charge operating expenses of up to 0.75%.
Treasury is promoting the bonds for savings. But stocks offer better long-term returns, and indexed bonds won't yield the income many senior citizens need. Investors will get checks based on a fixed interest rate twice a year, and accrue interest based on changes in the CPI--which won't be paid until the note matures or is sold. But tax must be paid annually on the total change in the bond's value. If inflation tops 4%, the notes may not pay enough to cover taxes incurred by investors in the top bracket.
Inflation doesn't seem to be a threat. So buying inflation-protection bonds may be like rushing out to buy flood insurance during a drought.
By Dean Foust in Washington
Updated June 13, 1997 by bwwebmaster
Copyright 1996, Bloomberg L.P.