Neglected Patriot Bonds still make sense

If you're still searching for that perfect Christmas gift, look no further than your Uncle Sam. It may come as a surprise to many Americans, but war bonds are still around and some financial planners consider them a very good, conservative investment.

Three months after the Sept. 11 attacks, the Treasury Department introduced "Patriot Bonds," which are actually Series EE savings bonds specially inscribed with the words "Patriot Bond." Lawmakers who urged the change said they were responding to constituents who wanted to help pay for the war against terror and relief efforts for the victims. Despite the new name, proceeds from the sale of Patriot Bonds go into the government's general fund and are not earmarked specifically to pay for the war on terrorism.

"Whether or not you support the administration's war efforts, Patriot Bonds are a good investment based on the merit of the bond itself," says Dan Pederson, author of "Savings Bonds: When to Hold, When to Fold and Everything In-Between." "The bonds pay three times what you may get in a short-term savings or money-market account and particularly for someone looking to preserve their capital, Patriot Bonds may be your best choice."

Of course, you should be aware of a few things before buying those Patriot Bonds either over the Internet through the Savings Bond Direct website (www.savingsbonds.gov) or over-the-counter at your local bank.

The current yield on Patriot Bonds is 3.25 percent - in effect through April 2005 - when most analysts expect the rate to rise slightly. The bonds sell for half their face value and are available in denominations of $50 to $10,000. Interest is compounded semiannually and the bonds increase in value every month. A bond may be cashed after one year, but bonds cashed before they are five years old are subject to a three-month interest penalty. The bonds are free of state and local income taxes, and stop earning interest at 30 years. Federal tax on interest earned can be deferred until a bond is cashed or reaches its 30-year maturity, whichever come first. But the interest could be tax-exempt altogether if used for education purposes. [Editor's note: The original story incorrectly stated the minimum holding period for EE Series savings bonds.]

"If you are in it for the short term and plan to cash out in less than a year, go with I bonds, which currently yield 3.67 percent," says Jack Quinn, a savings bond consultant and founder of www.savingsbonds.com. "But if you're a longer-term investor - three years or longer - I give the edge to the EE Bond."

In fact, over the last 12 years, the return on the EE bond has averaged 2 percent over inflation. That's better than I bonds, even though these are designed to protect holders from inflation. I bonds have averaged 1 percent over inflation since the government began selling them in 1998.

Despite this solid return, particularly during a volatile period for the stock market, the popularity of Patriot Bonds has fallen significantly since they were introduced in December 2001. The Treasury Department reported a 36 percent boost in sales immediately after Series EE savings were renamed and transformed into a war bond.

"After the introduction of Patriot Bonds, there was a large increase in bond sales for the first three months," says Stephen Meyerhardt, a spokesman for the Bureau of the Public Debt. "But since then, there has been no noticeable blip in sales."

Part of the reason may stem from the fact that the patriotic fervor in the US died down in the months following Sept. 11. Another reason may be the lack of marketing of Patriot Bonds.

"The last Congress completely eliminated the marketing department for the Treasury Department, shutting down 41 regional marketing offices across the country," says Mr. Quinn. "I also think this administration may not want to promote Patriot Bonds. It may implicitly give the impression that the US can't afford the war effort."

The White House denies this and says the Treasury Department has been at the forefront of helping to win the global war on terrorism. While that may be the case as it relates to cracking down on terrorist financing, the Treasury Department has not pushed the sale of Patriot Bonds in any significant way since their introduction. Nor has any high-level Bush administration official promoted them. As a result, many financial planners are unaware of their existence.

"I had no idea that EE savings bonds had a new name," says Steven Street, an accountant with Ross & Moncure in Alexandria, Va. "Having said that, I think they're not a bad deal for investors looking for a safe, conservative investment, looking to preserve their capital, and also looking to help the country pay for the war."