Your Money: I-bonds are an alternative to CDs

Series I savings bonds issued by the U.S. Treasury.
Series I savings bonds issued by the U.S. Treasury.
Posted: October 24, 2012

We receive pleas for assistance from readers quite often, especially those holding hard-earned savings in certificates of deposit, or bank CDs. The interest rate earned on these is not even keeping up with inflation, currently tracking between 1 percent and 2 percent.

Cry for help received!

Series I savings bonds can offer savers a way to earn better-than-average returns. Sold by the U.S. Treasury, I-bonds offer rates that fluctuate with the inflation rate, which usually increases when the economy improves. Savers who purchase an I-bond before November will receive an effective 1.11 percent annual yield on bonds redeemed after one year, according to MyBankTracker.com.

Series I savings bonds are an alternative to savings accounts or CDs. Though today's horrific interest rates are very low, those looking to earn some extra cash and have up to $10,000 to invest can earn up to three times the current national average of the 1-year CD rate tracked by MyBankTracker.com (0.55 percent annual percentage yield, or APY). Currently, the highest 12-year CD is 1.10 percent with Bank of Internet and CIT Bank (with a $25,000 minimum).

For more information on I-bonds, visit the Treasury's website ( www.treasurydirect.gov) or call: 800-722-2678 or 800-553-2663.

Are stocks fairly priced?

The Federal Reserve's low-interest-rate policy is designed to push investors out of savings accounts and back into riskier assets such as stocks. So we checked in with Gluskin Scheff economist David Rosenberg, the strategist whose research we can't afford! His view is that the stock market is fully priced, meaning its value likely won't go much higher.

"With earnings now contracting and record margins being squeezed, the reduced prospect of more multiple expansion is likely to leave the major averages range-bound at best over the near- and intermediate-term." In English, that means stocks aren't expensive, they're just about right.

Rosenberg says the trailing price-to-earnings ratio of the stock market is now 15.5. "But looking at five decades of history, we see that the average PE multiple at the peak of the market is 16 times - we are a half-point from that right now."

From his perspective, "there are slices of the stock market that I do like, even if I am not excited for the S&P 500 as a whole." It is the part of the equity sphere that behaves like a bond: dividend growth, dividend yield, corporate bonds, municipal bonds, Canadian banks, gold mining stocks (that now pay a dividend), energy and energy infrastructure, consumer staples and discount retailers.

The Fed policy of near-zero interest rates isn't working, according to Van Hoisington, the longtime money manager of Hoisington Capital. "How the Fed expects the U.S. to gain any economic traction from higher stock prices when rising commodity prices are curtailing real income and spending is puzzling," he writes in his latest quarterly letter to clients (link at http://bit.ly/Shs2S1).

For every dollar of gained real income, consumption rises about 70 cents, he estimates. Conversely, the Fed actions are causing real incomes to decline, which has a 70-cent negative impact on spending for every dollar loss.

Former Fed Chairman Paul Volcker says the Fed's latest initiative, a new round of so-called quantitative easing, or QE3, "is understandable, but it will fail to fix the problem."

401(k) contributions

The IRS just recently announced that it is increasing the 401(k) annual contribution limit to $17,500 in 2013. This is up from $16,500 in 2011, and $17,000 in 2012. The catch-up contribution limit remains $5,500. I found a handy chart of the various limits on 401(k) contributions at the 401(k) Help Center at http://bit.ly/TN51FP.

For the full news release, visit the IRS website at http://1.usa.gov/XKGXYu.


Erin Arvedlund is a finance reporter and a resident of Philadelphia. Contact her at erinarvedlund@yahoo.com or 646-797-0759.

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