Montreal, Canada

"This is a first sign of stress leading to higher Treasury yields and is not to be missed."

            -James Caron, Head of U.S. Interest Rate Strategy at Morgan Stanley

The above quote runs contrary to most Wall Street investment houses in 2010 whereby investors and traders alike still believe the United States Treasury is years away from a funding crisis, if any. But I don't believe that assertion. The U.S. is issuing record amounts of debt to finance bloated and out-of-control deficits with an estimated $1.3 trillion expected to be raised in fiscal 2010, according to the Congressional Budget Office (CBO).

On Wednesday, Treasury struggled to sell two and five-year notes. Recent data, however, shows Treasury has received overwhelming bids for most segments of the yield-curve. That trend is gradually changing and is likely to get worse over time as the Chinese accelerate sales of their massive inventory of U.S. Treasury paper.

What's happening in Greece and Dubai is heading our way – eventually. No nation, not even a reserve currency, can continue to fund deficits externally in the absence of domestic savings and no plan to reduce deficit spending. On the contrary, Bill Gross of PIMCO was quoted yesterday on Bloomberg throwing cold water on the recent Obama healthcare reform bill, claiming it will add another $562 billion dollars to the deficit over the next ten years. "Long-term bond-holders beware. No investment vigilante worth their salt or outrageous annual bonus would dare argue that current legislation is a deficit reducer."

Approximately 50-60% of all Treasury debt is held by foreign investors. China remains the single largest investor followed by Japan and the United Kingdom.

It is ridiculous to assume the Chinese will indefinitely gobble Treasury bonds as they recycle declining trade surpluses. The argument that China will continue to be America's #1 buyer of T-bonds is nonsense since the former has become more assertive since late 2008 requesting "guarantees" on U.S. paper. Prior to the credit crisis, the Chinese never uttered such requests, which should be construed as a shot across the bow for Treasury.

In the next issue of The Sovereign Individual, I'll make the case why this is one of the greatest opportunities to borrow or refinance ahead of the next secular bear market for bonds and interest rates. Most investors and borrowers have never witnessed a bear market in bonds since rates peaked in 1981.

Interest rates at these levels won't last much longer. It's also a great long-term speculation that long-term rates in the United States will double or more over the next five years as the Chinese accelerate T-bond dumping, pension funds reduce sovereign government debt and inflation rears its long dormant head once banks begin lending again.