Call us grouchy but we don't like the new, inflation-indexed Rubin Bonds. With all due respect to Federal Reserve Chairman Alan Greenspan (who likes them) and Treasury Secretary Robert E. Rubin (who's issuing them), we worry about this highly touted "risk-free" asset about to be sold to millions of unsophisticated investors.
It's not that indexed bonds don't hold certain virtues for some financial constituencies. Government likes them. By issuing long-term bonds that guarantee a fixed interest rate over inflation, Washington thinks it can finance its huge debt at lower interest rates. Individuals will like the concept because they think they will be able to sock away savings for retirement without having to worry about inflation.
But that's precisely the problem with the Rubin Bonds. People should worry about inflation. They should not be insulated from its corrosive power. They should scream bloody murder when inflation gets out of control. That's what the bond vigilantes do today in the global debt markets. Any hint of inflation sends rates sharply up, generating a tight discipline on government spending and monetary policy.
Diluting that discipline for individuals would be a big mistake. Back in the 1970s, when most salaries were linked to COLAs--cost-of-living allowances--people were insulated from inflation. The result: Inflation fed on itself. If inflation does spike, the higher borrowing costs will be borne by taxpayers, not investors. Who needs another unfunded government liability?
Investors, too, should be cautious before jumping into Rubin Bonds. British investors in inflation-indexed bonds have lost out big-time. Between 1985 and 1995, British indexed bonds provided an 8.8% annual return. Nice enough, but not compared with the 15.1% return from stocks. If you think, as we do, that the U.S. economy is in a low-inflation, moderate-growth phase that may extend well into the next century, indexed bonds make no sense to the U.S. investor, either.