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Tip: Assessing the risks of Treasury bonds

Should you be wary of the safest investment in the world?

Treasury bonds and notes, backed by the "full faith and credit" of the U.S. government, have always been a cornerstone of older investors' portfolios. In its "Beginners' Guide to Asset Allocation, Diversification, and Rebalancing," the Securities and Exchange Commission, the government agency that oversees the stock and bond markets, says an investor approaching retirement looking to decrease risk "might increase his or her bond holdings relative to his or her stock holdings."

Treasuries, held to maturity, have always returned their face value while paying a steady, guaranteed interest rate. And there is the additional benefit that the interest income is not taxable by New York State.

So what's not to like?

While Treasuries return their face value at maturity, if you have to sell them earlier you may get less than you paid for them. When interest rates rise, the value of the Treasuries in your portfolio declines.

"The worst place to be is in long-term government bonds when interest rates are going up," says Mark Snyder an investment adviser in Medford. Snyder has been bearish on Treasuries since the summer, when in a note to clients he warned of a possible bond bubble that could "burst on unprepared investors." His prediction started to come true this month, when a furious sell-off in the Treasury market caused prices to tumble.

For example, those who bought 10-year Treasuries on Oct. 8 locked themselves into a yield of about 2.30 percent, the going rate at the time. But by the middle of this month, the rate for 10-year Treasuries selling on the open market had skyrocketed to more than 3.5 percent as investors feared the growing U.S. deficit could spark out-of-control inflation. This caused a sharp decrease in the price. Investors who bought $10,000 worth of Treasuries in October would have received about $9,000 if they had to sell their notes just two months later, a 10 percent loss.

Snyder advises anyone interested in Treasuries to wait until they get closer to their historic norms. From 1962 to 2009, the average interest rate for 10-year Treasuries was 6.89 percent, according to data from the Federal Reserve.

For more information about investing in Treasuries, go to

treasurydirect.gov, the website of the U.S. Treasury Department.

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