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Inflation-Proof Bonds to Debut in January

September 26, 1996|JONATHAN PETERSON | TIMES STAFF WRITER

CORAOPOLIS, Pa. — Appealing to the "future and dreams" of hard-pressed working families, President Clinton on Wednesday announced that the government in January will offer bonds guaranteed to protect savers against inflation.

The 10-year notes, to be offered in amounts of $1,000 or more, will provide a return that protects investors from rises in inflation.

"Not a penny of value ever will be lost to anyone who buys them," the president told a rally in this Pittsburgh suburb, describing the new government securities as "a solid rock upon which families build their future and dreams."

In the spring, Treasury Secretary Robert E. Rubin signaled that the administration was exploring inflation-protected bonds.

Until now, however, officials had not revealed key information about the potential investments. According to the details announced Wednesday, the bonds will be offered beginning Jan. 15, 1997, have a 10-year maturity and be indexed to the Consumer Price Index.

In addition, Clinton announced that U.S. savings bonds with inflation protection will be offered in denominations as small as $50 by January 1998.

Inflation-protected securities have been discussed inside the government for decades, although they have long met internal resistance.

One concern has been that such a program would seem to reflect an acceptance of inflation, and that government officials ought to be combating inflation rather than resigning themselves to it and giving the public new ways to live with it.

But following the examples of Britain and Canada, Treasury officials have gradually come to see the inflation-indexed bonds as a way to create a popular new savings vehicle for the public while potentially reducing the government's own borrowing costs. The theory is that since investors demand a risk premium--higher interest rates--to protect themselves against inflation, the indexed bonds can be sold at a lower interest rate.

"We believe this is a win-win situation," one White House aide said.

Rubin said Wednesday said that Alan Greenspan, chairman of the Federal Reserve Board, was supportive of the plan, which officials hope might lead to an increase in the nation's savings rate.

"I believe when you offer people a better way to save, there is a real chance of increasing the national savings rate," he told reporters.

The inflation-protected securities, which can be offered without congressional approval, are the latest in a series of presidential actions that underscore the vast powers an incumbent chief executive can bring to bear in a reelection effort.

Under the plan, the interest rate on the bonds will be set when the bonds are first offered. The rates are expected to be below current rates on bonds because of the inflation-protection feature.

If, for example, the rate is 3%, that rate will be locked in upon purchase. If inflation as measured by the CPI then runs at 4% for the next year, the principal value of a $1,000 bond would be raised to $1,040, fully compensating the bond owner for inflation.

Clinton also proposed eliminating the restriction that purchasers of education savings bonds be at least 24. The broader eligibility would enable younger people to qualify for certain tax benefits of such education bonds.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

The U.S. Treasury 'Inflation-Protection' Bond

* The investment: Ten-year government securities priced at $1,000 and up that guarantee an added return to offset any rise in the cost of living. This offset will be pegged to the rise in the consumer price index and will be calculated semiannually.

* The market: Individual investors worried about inflation eroding their savings over many years. The bonds aren't expected to have much appeal to big institutional investors.

* The strategy: The bonds' interest rate will be set by market demand at Treasury bond auctions. The rate will probably be lower than those of other Treasury bonds because the investor isn't carrying the risk of inflation. Thus, the investor will be trading a higher return for peace of mind. Treasury Department experts say they aren't recommending these bonds as all, or even the largest part, of an investor's portfolio. Instead, they say, they can be a low-risk part of a portfolio, to be mixed with higher-risk, higher-yield investments.

* The reaction: Market analysts mostly approve of the bonds as a vehicle for small investors. However, in Canada and Britain, where such bonds have been offered for several years, demand has been weak.

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