US Treasury bonds facing selling pressure

This is exactly what I've been pounding the table for--sovereign funds are turning their back on US debt issuance because they have been burned by the US government's irresponsible monetary policy. Former Treasury Secretary Paulson was in Beijing begging for them to keep funding our debt, and they have now reached the "screw you" stage.

Here is a question that doesn't require much deductive reasoning: with a lack of buyers, who else is going to buy our US Treasury bonds? The Chinese, the Koreans, and the Saudis have explicitly said "don't expect us to bail you out anymore". The Japanese are more polite about it: they merely said "we need to bail out our own economy", but they aren't stepping up either. The Chinese, Japanese, German, British and Saudi central banks have been the biggest buyers of our Treasury bonds in the past.

With no demand, and tons of supply about to hit the auctions, what happens then? The answer is interest rates have to rise to attract investors, assuming the US government is good for it (which is more at risk every day). In other words, the credit rating on our government doesn't even have to be downgraded to make our government's borrowing costs higher--the bond market will determine it for us. Short-term bills are directly influenced by Fed policy, but the Fed has very little say in the 30-year Treasury bond market--that market is too huge and is an aggregate arbiter of inflation expectations (a bet on bonds means investors believe inflation will be in check and interest rates will NOT rise until maturity).

That's why I've been shorting 30-year T bonds (betting US Treasury prices will decline as interest rates WILL rise). Bill Gross, the world's biggest bond investor thinks rates could go to 7%, while Julian Robertson, billionaire hedge fund manager wasn't explicit, but whispered "Paul Volcker" type interest rates--or 18%. That is a doomsday prediction, because our $11 trillion dollar debt compounding at that rate would torpedo our economy, as the US Government, considered the safest investment in the world, would have have to default on their IOU's. The bond market, much bigger than the stock markets (equities) would implode, and we WILL go back to the stone age in that event. We would just be one big Iceland, only since our economy is much bigger, the financial aftershocks would be felt for decades.

I am not betting on that scenario, but I am betting that the Fed will print dollars even faster--to avert that financial armageddon. Print more money? Create more inflation, causing interest rates to soar even more? Sounds like the vicious spiral it is. At some point, rates will be high enough to crater all asset prices--again back to where they should have been all along. That's why that former million dollar house may seem cheap at $600K, but it could get even cheaper still all the way to $300K--or worse. And that's exactly why propping them up at $600K won't work.

Should we keep building these trillion dollar deficits? We are 100% on that path to destruction, probably in the 5th inning in a 9 inning game, ending sometime within 5 years. Every step we have taken is leading us toward this perfect storm. Last year's collapse in real estate and stock markets are just a harbinger of things to come in the bond market.

THAT is why bailouts are dangerous, and going deeper into debt to solve a debt problem is a game of chicken that cannot have a happy ending. But the government, along with the blessings of monetary theorists still believe trillion dollar bailouts (government "investments" in infrastructure), will solve our financial problems. Just print more dollars and everything will be fine, according to their misguided logic. To be specific, I DO believe we should make investments in the right infrastructure projects, but the bill about to pass includes 10 years of pent up pork for congressmen to satisfy their constituents. It is not based on merit.

Interest rates have already moved up more in 1 week than it ever has from its all-time low in December, when I put in the trade. The Fed will try a last-ditch effort to suppress interest rates (and mortgage rates in the process), but manipulation never works long-term--it will only cause short-term distortions before the dam breaks. The Fed won't be able to control the long end of the curve, and our $2 trillion deficits will double and triple as interest rates soar. Investors will dump bonds (as they are starting to do) because they are losing confidence in the US Government's creditworthiness and solvency. Although it is unthinkable, investors are questioning whether the US Government can pay back their debt obligations. Look up the definition of solvency and show me how the US Government deserves it's AAA credit rating. The balance sheet is bloated with debt, and that debt level is soaring by the second. Left unfettered, our national debt will eventually and terminally choke our economy.