This is what I've been waiting for !

Treasury Bonds: In the Eye of the Storm

Market participants are looking for consensus on the penalties that may be levied on the U.S. government for its bailout and stimulus policies. Penalties in this case are expressed in lower demand for Treasuries and therefore, higher interest rates to attract demand.

Yes, interest rates are rising. The yield on the 10-year Treasury note leaped from 2.45 percent to 3.75 percent in just 10 weeks. But it's not growth that's driving yields on U.S. government debt ... it's inflation fears! Therefore, the dollar has been under pressure.

The U.S. government is adding trillions of dollars in new debt. And according to the IMF, the debt level in the U.S. is expected to surge from 63 percent of GDP in 2007 to nearly 100 percent of GDP by 2010.

But the dollar-bears and hyper-inflation theorists shouldn't get too excited. In the worst global recession since World War II, inflation is not the problem. It's deflation. Inflation will be a concern when all of the structural issues have been fixed, employment recovers and the money being printed turns into consumption.

Even with manipulated mortgage rates, which went as low as 4.8 percent from 6.5 percent just nine months ago, the number of mortgage delinquencies and foreclosures hit record levels in the latest report. Now prime fixed-rate foreclosures are outpacing subprime.

This inflation scare and climbing interest rate scenario puts increased pressure on an already fragile domestic and global economy and increased pressure on the Fed. Moreover, a continued deterioration in the U.S. housing market is:

Not good for the U.S. consumer,

Not good for export-driven global economies,

Not good for the global financial system.
Rather, it prolongs a problem that is at the core of the financial and economic crisis and exposes financial markets to more risk — just when the general sentiment is getting more optimistic.

All of the economists polled by the National Association for Business Economics predict the recession to end by the first quarter of 2010. It's this type of optimism that is feeding the risk appetite of investors. And it's this type of optimism that creates increased vulnerability in financial markets to a negative surprise.

With the growing complacency, another dip in this global recession could create some very gun-shy investors, a return to risk aversion and another leg higher in the dollar.