You’d think that after the dot-com bubble … the housing bubble … and the bubbles in commercial real estate and private equity, investors would have learned their lesson.

Nope! They did the same stupid things this fall …

• They chased long-term Treasury prices higher and higher (just like they chased Miami condos and Pets.com),

• They drove prices to loftier and loftier levels,

• And they relied on the Fed to save their bacon.

Investors who bet that long-term bonds would surge, are getting their heads handed to them.

And now, they’re getting their heads handed to them! Long bond futures have plunged a whopping 20 points — from 143 in mid-December to less than 123 yesterday. The yield on the benchmark 10-year Treasury Note has exploded from a fall low of 2.06 percent to 3.11 percent this week — a gain of 51 percent. Key technical levels are giving way all over the place.

Fortunately, you had the market’s playbook. You were told in no uncertain terms — right here in Money and Markets — that the Treasury market was caught up in a huge bubble, one that was destined to pop.

As I said in early December:

“The truth is the U.S. government is going to have to flood the market with a wave of Treasuries the likes of which the world has never seen. And just like any other market, the bond market reacts to supply and demand.

“Too much supply and not enough demand should drive prices lower.

“Bottom line: There are lots of reasons to believe this Treasury rally is unsustainable, and that a day of reckoning is fast approaching.”

Now, let’s talk about why this is happening … where we’re headed next … and what the implications are for you and your investments.

The Biggest Debt Binge
In World History

The immediate catalyst for this week’s bond market break? The Fed’s refusal to increase the amount of Treasuries it has committed to buy. The Fed said at a policy meeting several weeks ago that it would purchase up to $300 billion in Treasuries, and it didn’t alter that target at this Wednesday’s gathering.

But I believe the problem is MUCH bigger. For starters, as I mentioned in my Money and Markets column last week, the Federal Reserve has been backing up the truck and buying every crappy piece of paper it can get its hands on. Lousy residential mortgages. Crummy commercial real estate loans. Toxic CDOs, credit card bonds, student loans — the Fed is buying or loaning money against anything and everything!

I warned that at some point, this would be viewed as bearish for the dollar. I also said it would only add to worries about the perceived credit quality of the U.S. itself. We’re starting to see the dollar get clubbed now and clearly, U.S. debt is getting trashed.

With the Fed and Treasury borrowing and spending like crazy, we’re starting to see the dollar fall.

It’s not just the Fed, either. The U.S. Treasury is doing its part, too. Indeed, we’re borrowing and spending the country into oblivion!

This week alone, Treasury sold a record $26 billion in seven-year notes, a record $35 billion in five-year notes, and $40 billion of two-year notes. Next week, we’ll get a record $71 billion in longer-term debt issuance.

Total net borrowing needs for the second quarter are now up to $361 billion. That’s up 27-fold from $13 billion a year earlier and more than double the previous estimate of $165 billion.

We just learned the Treasury will start selling 30-year bonds every month, as opposed to eight times a year. And speculation is running rampant that the U.S. will soon start auctioning off 50-year bonds! All this issuance is needed to fund a federal budget deficit that’s projected to hit at least $1.75 trillion this year and $1.2 trillion in fiscal 2010.

The Implications For You …

First, I’ve implored you to dump long-term bonds for several months now. If you followed that advice, you saved yourself a world of hurt. The average long-term government bond fund has already lost 11.2 percent in value this year, according to Morningstar, and we still have eight months to go!

Credit spread tightening has helped diversified, long-term bond funds perform better. But even they’re showing year-to-date losses, on average.

My advice remains the same: Get the heck out of the LONG-TERM part of the bond market while you can. Stick with SHORT-TERM Treasury bills. They are not subject to the same price risk and credit concerns as longer-term notes and bonds.

Second, if you’re a subscriber to Safe Money, you’ve already received specific instructions on how to PROFIT from declining bond prices. Good for you! We’ll keep you updated in our letter on what to do going forward. [Editor's Note: Want to get Safe Money's "buy" and "sell" recommendations for just 26 cents a day? Then click here.]

Meanwhile, if you’ve been waiting to refinance your mortgage, I wouldn’t hold off any longer. The Fed has been trying to manipulate the bond market in order to hold rates down. But the cumulative “sell” decisions of investors around the world are starting to overwhelm Bernanke & Co.

Thirty-year mortgage rates are still hovering in the high 4 percent area. But they’ll climb if bond prices continue to tank.

Until next time,

Mike

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Last 5 posts by Mike Larson

• Tightening Begins Overseas; Here? Not So Much … - October 9th, 2009
• Straight talk on the Obama mortgage plan - February 20th, 2009
• Construction spending down, but not out ... yet - January 5th, 2009
• Early results show dismal holiday retail sales - December 26th, 2008
• November new and existing home sales both fall - December 23rd, 2008