The market’s revenge: U.S. Treasury bonds are the next victim!

In each successive phase of this debt crisis, investors have consistently attacked and destroyed the market value of institutions that owned large amounts of toxic assets — Countrywide Financial, Fannie Mae, Citigroup, Bank of America and many others. Their shares were pummeled; their ability to raise new capital, virtually extinguished.

Now, the U.S. government itself is about to become the next victim of the market’s revenge. Explicitly or implicitly, the U.S. Treasury has recently assumed the liability for trillions of dollars of bad mortgages, commercial paper, and consumer credit. Directly or indirectly, it has placed its credit, credibility and borrowing power in jeopardy.

The consequences:

• China, Japan and other global investors are beginning to dump long-term U.S. Treasury notes and bonds in favor of short-term Treasury bills or even gold.

• These new, unexpected supplies of bonds are being tossed on the market on TOP of the massive supplies the Treasury must issue to finance its mammoth $1.84 trillion budget deficit estimated by the Obama administration for fiscal 2009.

• Treasury bond prices are starting to collapse, driving long-term interest rates sharply higher.

• Consumers and businesses will have to pay exorbitant rates to borrow or won’t be able to borrow at any price.

• You can expect a sweeping, devastating impact on the economy, especially in the real estate market. Even with LOWER mortgage rates, this market is already in a state of collapse. With HIGHER mortgage rates, any hope for stabilization will be dashed.

• Thousands of insurance companies, banks and derivative players betting on low interest rates will suffer a new round of losses that could make the subprime mess seem small by comparison.

• On the positive side, investors who can wait patiently will have a major opportunity to buy long-term Treasury bonds and lock in far higher interest rates in the future. But investing in bonds at this time can only lead to crushing losses.

Comment by staff writer Elizabeth Kelly Grace:

Martin D. Weiss warned clearly and unambiguously about this next phase of the debt crisis: In his New York Times bestseller, The Ultimate Depression Survival Guide, he dedicated a chapter to explaining why Treasury bonds would be the next big shoe to fall in this debt crisis.

And in his white paper to Congress in March, he warned that, the most dangerous consequence of the government’s bank bailouts would drive Treasury bond prices into a collapse and severely damage the government’s borrowing power.” He wrote:

“Continuing attempts by the U.S. government to provide all or most of that capital needed to bail out failing institutions can only force it to

” – borrow even larger amounts in the open market,

” – drive up market interest rates,

” – damage its credit rating,

” – jeopardize its borrowing power in the financial markets,

” – make it increasingly difficult or expensive to finance its bulging deficits, and

” – in a worst-case scenario, make it next to impossible to refund maturing debts …

“The credit of the U.S. government is being damaged by its assumption of trillions of dollars in direct or indirect liabilities for companies like Fannie Mae, Freddie Mac, AIG, Citigroup, and many others. … Unless the U.S. government ceases to assume responsibility for these liabilities, the credit and credibility of the U.S. government can be damaged far more.”