“That will never happen to this country.”

- Timothy Geitner in response to suggestions that the U.S. Treasury may one day lose its Aaa credit rating.

Perhaps inspired by Niall Ferguson’s dramatic Financial Times piece, “A Greek Crisis Coming To America“, we see today as a prime opportunity to recap our short U.S. Long Term Treasury position and share our argument for why you should buy more TYO (Direxion 3x Bear U.S. 10 Year Treasury ETN).

It’s not every day you hear about nations going belly up, yet this “new normal”, coined early on by PIMCO’s bond master Bill Gross, has even professional analysts spinning deep under water and starving for air. So what is the new normal? Bill Gross claims it’s an investment environment where risk/reward relationships come back towards historical standards and where inflation eventually mucks the lions share of investors’ profits. Now, Niall Ferguson describes it as a world where the U.S. government ranks 6th on the IMF’s list of nations in need of cutting expenditures. According to the report, the United States must cut government outlays by 8.8% over the next 10 years to remain “financially stable”.

Were this the early 1980′s where the 10 year Treasury Note carried a yield near 16%, the talk of insolvency would be merely a footnote to the effective borrowing cost of the U.S. Government. However, contrary to 1981 the current 10 year yield is just shy of 3.7%, which happens to be lower than any point in any year from 1962 to 2003.

So why the low yield, why the high demand for U.S. Treasuries? The argument that treasuries have served as a safe haven from stocks doesn’t hold weight, because global equity markets have surged since March 2009. We all know about the $1.6 trillion U.S. deficit in 2009, the $2 trillion Fed balance sheet, and yesterday’s announcement of tax breaks to hiring businesses; all of which must make it more difficult for the U.S. government to pay it’s bills into the future. According to Ferguson this is just the beginning, since China, the largest holder of U.S. treasury paper, has cut T-bill purchases from 47% of the total issued in 2006 to 5% in 2010.

Who’s buying U.S. debt?

To be blunt, we don’t know. The fact is, it doesn’t really matter. No one SHOULD be buying it, so the fact that they are only increases the potential for us to profit from their ignorance. Take a glance at the TYO chart below.

As noted in the visual, TYO’s handle is sitting right at the 50 day simple moving average resistance line, which bottomed at the beginning of February for the first time. Also, the MACD in the histogram below the chart shows a “bullish” cross potentially occurring in the next couple sessions. We’re putting long term money in this vehicle, since it’s the closest thing to a sure thing.

Either (a) you don’t believe our position that U.S. debt will be devalued and that the recovery will unravel or (b) you believe everything we say. In scenario (a) stocks will do well as bonds suffer and this vehicle will at minimum retain it’s value. In scenario (b) S&P and Moody’s downgrade U.S. sovereign debt in the next two years and the recovery fails to pick up speed, causing for a exodus of money invested in all U.S. Dollar assets, especially U.S. Debt.

The choice is yours…

Happy Trading