Dugald Malcolm, Montreal, Canada.

When the markets started heading south in 2008, the go to investment vehicle quickly became U.S. Treasury bonds. In a world of market uncertainty and fear, Treasury bonds represented a haven of safety of investors. Again, in May of this year, with markets in panic over the European debt crisis, investors rushed back into Treasury bonds. Recently, however, that interest has waned and, as Eric pointed out yesterday, bond yields have spiked.

What has driven this rise has been an increase in concern with the U.S. government’s failure in its ability to curb the ever growing deficit spending. With European countries being forced to tighten their purse strings, the U.S. continues to pile more money onto its mountain of debt, illustrated in the government’s recent announcements to extend tax cuts. It is interesting that yields on the 10-year Treasury bonds hit a six month high this week in the face of Bernanke’s new monetary policy, QEII, designed to have the exact opposite effect on yields.

The above chart spells trouble for the benchmark 10-year note. The upward trend, in place since May, came to an end last month, when prices fell below the trend line. Since then, prices have continued to decline, culminating with the recent bearish cross of the 200-day moving average on Wednesday. The MACD, also showing significant weakness, is continuing its decent ever lower below the zero line. It is clear that this downtrend is gaining momentum, as demonstrated by the ADX now above 20 and the -DI line well above the +DI. With technicals and fundamentals looking negative, things do not bode well for the 10-year bond prices.

Earlier this year, Bill Gross of Pimco pointed out that despite the remarkable rise of equity markets since the low of March 2009, investors continue pouring into bond funds, such as his own, the Pimco Total Return Fund. This bond fever gave Gross cause for concern, telling Bloomberg in an interview, “Bonds have seen their best days.”

And it’s not just the recent heightened interest in bonds that is troubling. For nearly three decades, bond prices have pushed higher and higher. From a yield of 15.8% in 1981, 10-year Treasury bonds hit a low of 2.03% at the end of 2008. It begs the question “Are we in a bond bubble?”

With yields at 3.27%, however, the bond bubble is still far from being burst. That being said, investors might be prudent to re-examine their sense of confidence and safety associated with U.S. Treasury bonds. With mountains of debt and the inevitable inflation that lies ahead, it might be wise to follow Bill Gross’ advice and look to other countries to purchase debt of other countries with lower deficits such as Germany and Canada. And, of course, as Eric and I always like to point out, there is always gold…

Have a good weekend!