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November 22, 2004 11:55 AM

Scary Bonds


Excerpt: How can Treasury bonds possibly be priced as they are today? Who would buy them when they practically guarantee an after-tax loss?


HERE'S AN INVESTMENT that's such a rip-off that Eliot Spitzer ought to be investigating it.
It ties up your money for five years and produces almost no profits. And then you have to pay taxes on the profits you didn't make in the first place.

Who would sell unsuspecting investors such a horrible investment? The U.S. government, that's who.

And if you're like most investors, you probably have this rip-off in your portfolio right now. I'm talking about U.S. Treasury bonds.

Just do the math, and you'll see. Suppose you buy a five-year Treasury bond at today's market price — it yields 3.48%. That means that for every $100 you invest, you get $3.48 each year in interest.

Not a stellar return, but at least it's safe — right? Wrong. You're forgetting about inflation. On Wednesday the Department of Labor announced the latest Consumer Price Index, and right now inflation is running at an annual rate of 3.24%. That means that in a year, when your $100 bond investment has produced income of $3.48, you've lost $3.24 to inflation.

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