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Answer:
Dear
BuyandHolder,
I
assume you're referring to the 30-year Treasury which
has been on a four year hiatus.
Yes...in
early Augusut, the government announced that starting
next year it will again offer investors its so-called
"long bond". It hasn't been around since 2001.
The
general, unofficial feeling is that the bond will
provide a way for the government to raise money at
low rates to finance the federal deficit. The White
House's most recent projection is that the deficit
for this year will be around $333 billion.
Like
other US Treasuries, the 30-year bond comes with certain
positives -- it has a guaranteed interest rate; bondholders
are not hit with state income taxes; it is considered
very safe since it is guaranteed by the U.S. government
and it is issued in $1,000 increments.
You
will find details at: www.treasurydirect.gov.
You can also get information by calling: 800-722-2678.
The
first auction of $10 to $15 billion worth of bonds
will take place in February. Another $10 to $15 billion
will be auctioned later in the year.
The
question is should you lock up your money for 30 years?
That's a long time. Even a spokesperson for the Bureau
of Public Debt in Washington said at the time the
news was released, "Whether anybody really is going
to lock in a 30-year security at today's interest
rates is a question."
In
the past, long-term bonds have been popular with both
insurance companies and pension plans. That's expected
to be true with the newly issued bond.
As
we go to press, a 5-year Treasury is yielding 4.23%
and a 10 year, 4.39% while the old 30 year T-bond,
sold on the secondary market, comes in between 4.1%
to 4.4%.
Of
course, until the new 30-year bond is actually sold,
-- some time in February 2006 -- we won't know what
the yield will be.
However,
keep in mind that there are other ways to get yields
of 4% or more. For example, a handful of banks are
offering five-year CDs yielding 4.5% of more -- although
they are not free from state income tax. Several bank
stocks have yields between 4.1% and 4.7%. Two other
types of stocks, public utilities and REITs (real
estate investment trusts) traditionally have high
dividend payouts.
$Tip:
Interest from a bank CD is taxed at your maximum tax
rate -- which could be as high as 35% (during 2005).
Qualified stock dividends, on the other hand, are
taxed at the lower long-term capital gains rates --
15% for most people and for those in the lowest tax
brackets, only 5%.
Bonds
& Your Portfolio
It's
important, however, to have bonds in your portfolio.
As we've discussed in previous columns, one way to
reduce risk is through diversification -- stocks,
bonds, bank CDs, money market accounts.
Good
luck!
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