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After the fall of the 30-year Treasury bond

Last month's scuttling of the 30-year US Treasury bond by the US Treasury Department touched millions of Americans, many of them indirectly.

The main effects were to help nudge interest rates lower on big-ticket items such as mortgages and cars, and make intermediate-term bonds (such as the 10-year bond) more attractive to investors.

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Few individuals actually hold 30-year bonds, although many own them within their mutual-fund portfolios. The 30-year bond - dubbed the "long-bond" in investment circles - was mainly sought out by institutional investors, such as banks and pension funds.

First issued in 1977, the US Treasury sold over $600 billion worth of the products. By ending the bond, however, Uncle Sam reduces its borrowing costs, while putting downward pressure on long-term rates. (Short-term rates have also been coming down, the direct result of rate cuts by the Federal Reserve.)

Lower rates, of course, add up to good news for consumers. The result, however, is not as sanguine for investors as yields head south.

Still, Treasury issues remain attractive for many mutual-fund investors, says Scott Berry, who tracks bond products for financial information firm Morningstar Inc. While mutual funds based solely on US Treasuries now offer low yields - about 3 percent or less on US government money-market funds, for example - funds that buy different combinations of government products such as agency issues have returned well above 5 percent.

An agency-based fund category Mr. Berry likes is Ginnie Mae (GNMA) funds, which typically yield 0.5 percent to 1 percent more than Treasury bond funds.

Perhaps not surprising, since Sept. 11, investors have poured their dollars into US government bond products - representing a "flight to safety." But the large infusion has pushed yields down - to under 3 percent, for example, on 2-year Treasury notes.

Since they are backed by Uncle Sam, government bond funds don't carry the risk that the bond issuer will default. But they still face the risk of fluctuating interest rates.

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Even with lower rates, bond holders can often come out ahead or equal with corporate bonds, since interest payments on Treasury issues are generally exempt from state and local taxes.

Those looking to buy government issues can purchase them through mutual funds or from the Treasury through the "Treasury Direct" program (www.publicdebt.treas.gov).


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