Don't get caught if the Treasury 'bubble' bursts

— -- Q: Warren Buffett said Treasuries are in a bubble right now. What does that mean?

A: Warren Buffett's annual letters to Berkshire Hathaway investors are always worth reading.

The letters are one part common sense, one part business sense and one part shareholder information. You can read more about this year's letter here.

In one section, Buffett points to the current rush into U.S. Treasury bills, notes and bonds as the latest bubble in capital markets. He writes:

"When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."

Yes, you read that right. Buffett is saying the value of U.S. Treasury securities has been pushed to bubble levels. Certainly, panic over the health of the financial system has pushed investors to buy dollars and load up on Treasuries. When investors rush to buy Treasuries, they push prices up and yields down. In fact, at one point last year, buyers in short-term Treasuries were willing to accept negative yields. That is, they were willing to take back less money than they were lending, if only to be assured that they would get most of their money back.

Adding to the risks facing Treasuries is the fact inflation could be a side-effect of the government's massive borrowing and spending to stimulate the economy. If inflation kicks in, Treasury prices will likely suffer. If at the same time investors choose to escape this safe haven, Treasury prices could be in for a big fall.

What does all this mean? It means you shouldn't lock up all your money in long-term Treasuries.

If interest rates rise, you could see the prices of your Treasuries fall. And remember, when buying bonds, it's a good idea to ladder your portfolio. USA TODAY columnist John Waggoner teaches you how here.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.