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One cheer for war bonds
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January 18, 2002: 5:02 p.m. ET
Profit, not patriotism, may be the best reason to buy.
By Money magazine editor-at-large Jean Sherman Chatzky
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NEW YORK (Money Magazine) - It was late November in Minneapolis. Colin Lundgren, senior portfolio manager for fixed-income investments at American Express Financial Advisors, and his wife Wendy had just logged some hours Christmas shopping at Mall of America.
They had tossed their shopping bags from Nordstrom and Waldenbooks into the back seat of their SUV and were headed home on Highway 6 when, believe it or not, the talk turned to "patriot bonds," the war bonds coming out in mid-December. "If you look at their economic value compared to other investments, they just don't stack up," Colin sniped. Wendy stared at him. "Listen to yourself," she admonished. "You need to take off your portfolio manager hat and put on your hat as an American and a father." Her argument shook him.
Maybe there are times, Colin thought, when investment decisions aren't just about coupon payments and 10 extra basis points.
That's the rationale that has interest in patriot bonds running high. According to Savingsbonds.com, which helps investors analyze and track their savings bonds, hits on the site have tripled since patriot bonds were announced.
Unfortunately, it's difficult to determine how much good buying these bonds will do. The patriotic case for war bonds was clear back in World Wars I and II. The government needed to issue bonds -- $185 billion worth in W.W. II alone -- to finance the war effort.
Not so today. The Treasury Department is not only running a surplus, it's been buying back outstanding debt and in late October said it would stop issuing 30-year bonds. Obviously, we could finance the war on terrorism without issuing more debt.
More confounding yet are mixed signals from the government. You can't open a newspaper without reading that the best thing we consumers and investors can do with our money is spend it, not save it. Yet simply by issuing this debt, Washington is de facto promoting saving. The proceeds aren't even earmarked for the war; they're going into the government's general fund.
So what's an investor to do? Run the numbers, says Morningstar fixed-income analyst Eric Jacobson. Patriot bonds are identical to EE savings bonds, except for an imprint on the right-hand side. They come in the same denominations, with the same 4.07 percent yield, free from state and local taxes and federal tax deferred until redemption.
By contrast, five-year Treasuries recently paid just a tad more -- 4.46 percent -- without the tax deferral. And like savings bonds, patriot bonds have their payout reset every six months, so if rates rise, you can benefit (next adjustment: May).
Patriot bonds also make good starter investments because they're easy to deal with. You can buy (and redeem) them at your local bank, or you can purchase them on the Web at Savingsbonds.gov for as little as $25. And the fact that they double in value in 17 years is easy to comprehend.
Which is ultimately why Colin Lundgren decided to buy bonds for his three kids. "I can sit down with them and explain what this bond is, how it can be used to pay for college and how in the meantime at least some of the proceeds are being used by our country to battle terrorism," he says. "This gives me a way to talk to my kids about the price we pay, literally and figuratively, for freedom."
Editor-at-large Jean Chatzky appears regularly on NBC's Today. You can contact her by e-mail at moneytalk@moneymail.com. 
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