It’s worth noting that Monday’s auction for 3-year debt was met with ravenous, near-record demand and that Tuesday’s 10-year sale met a bid-to-cover ratio of 2.8… historically high for the 10-year, but not even close to the 3.3 ratio for the shorter dated bonds the day before.

“The market is sending many errant signals right now,” notes Dan Amoss. “U.S. policymakers are trying to reinflate stocks, houses and wages, while also recapitalizing an undercapitalized banking system with overt and covert subsidies. All of these actions are extraordinarily costly — so costly that creditors are getting nervous.

For the rest of the article, read Ian Mathias at The Daily Reckoning.

The U.S. treasury broke two bond sale records this week: Uncle Sam sold $21 billion in 10-year notes Tuesday and another $14 billion in 30-year bonds yesterday — both all-time daily highs.

Both are just small pieces of the expected $2 trillion in U.S. debt sales this year… at least.

But bond investors are finally starting to see the forest for the trees. The yield on those 10 years climbed above 3% this week, the highest level in more than three months.

“Except for U.S. Treasuries, what can you hold?” lamented Luo Ping, the director of China’s Banking Regulatory Commision.

In a speech in New York yesterday, Luo said China will continue to buy and hold U.S. Treasuries. With a giant tone of reservation: “You don’t hold Japanese government bonds or U.K. bonds. U.S. Treasuries are the safe haven. For everyone, including China, it is the only option.

“We hate you guys,” Mr. Luo said, half kidding after his speech. “Once you start issuing $1-2 trillion… we know the dollar is going to depreciate, so we hate you guys, but there is nothing much we can do.”

Maybe they should buy gold. The spot price is up $50 since Tuesday, to $950 an ounce. Considering fleeting investor confidence in U.S. paper and all the stock suffering Tuesday, can’t say we’re surprised.

“We are bearish on U.S. government paper in all its forms,” says Bill Bonner. “And here’s why. The latest estimate from Goldman Sachs puts U.S. government borrowing for this fiscal year at $2.5 trillion. Meanwhile, foreigners are showing less and less interest in U.S. debt. They’re switching to short-term paper — bills and notes, which are less vulnerable to inflation and currency declines. And they’re pulling out of U.S. Treasury market generally. The total percentage of U.S. debt owned by foreigners is falling from 60% down to about 40%… a huge drop.

“Either one of two things will happen. If the government funds its deficits honestly — by borrowing from willing lenders — this huge extra demand for credit will force up yields… thereby lowering bond prices. Or if the government resorts to “monetizing the debt” — that is, funding its debt with printing press money — investors will flee bonds, in fear of higher inflation.

“Either way, it will be bad news for bond prices.”

At the same time, the U.S. budget deficit has risen to a record $569 billion in just four months. With the $83 billion January deficit the Treasury reported yesterday, I.O.U.S.A. has already topped its own annual budget deficit record, despite being just four months into the fiscal year.

At the current rate, the 2009 annual budget deficit will exceed $1.7 trillion, almost four times 2008’s record deficit and $500 billion over the Congressional Budget Office’s latest projection.

Stocks managed small gains yesterday after the Geithner debacle on Tuesday. Falling oil prices mired the energy sector, while a lack of data and even fewer earnings surprises gave traders little reason to bounce back from Tuesday’s big loss.

In the end, most major indexes inched up less than 1%. The Dow ended the day at 7,939. The S&P settled in around 833.

“I’m looking for a break above the intermediate range on the S&P at 878” notes options trader Wayne Burritt. “That should signal a move to the upside of the range. That means a run to 944 — the very top of this large trading channel — could easily be in the cards.

“In spite of a ton of terrible fundamental news, the stock market is holding onto its base. That shows uncommon resilience and, in the near term, is bullish for stocks.

“That said, it’s also not time to kid ourselves. While the market should continue to bottom out in the 800 area for some time, it’s not going to really break out to the upside until some solid fundamental data begin to show improvement.

“Remember, the stock market tends to be a leading indicator of where the economy is headed. So we’re not looking for every data point to turn to the upside. We just need a few here and there, and then investors should begin buying with more conviction.

“Specifically, I’d like to see some good news out of the housing and jobs front.”

Maybe we can find some good news in the mortgage market.

Ummn… no. Despite historically low mortgage rates, mortgages applications have plummeted to an eight-year low.

Applications fell 25% last week alone, the Mortgage Bankers Association reports. According to the group, the recent acceleration in unemployment is partially to blame. But mostly, consumers know the government is going to keep pushing rates lower.

Today, the national average for a 30-year fixed is 5.19%. But the Fed and Treasury have vowed to keep defibrillating until the rate hits 4.5%.

OK, how about on the foreclosure front? The U.S. foreclosure rate improved in January. “Only” 274,399 foreclosure filings hit the books in January, down 10% from the month before.

Wait… what’s this? According to RealtyTrac, most of decline was due to a moratorium on foreclosures at Fannie Mae and Freddie Mac. Ah, we see the logic. If you don’t allow foreclosures to take place, the problem will just go away. Impeccable.

Bummer. Foreclosures were still up 18% annually. The trend remains.

Jobs? Any good news there?

The number of continuing claims for unemployment insurance hit another record high today, says the Labor Department. A record 4.8 million people were sucking the government teat in the last week of January. New claims did come off their recent 26-year high, down 8,000 to 623,000 claims.

U.S. retail sales perked up 1%, the first increase in retail activity in six months. That’s good news, right? Darn. Still no… the majority of the retail bump was due to higher gas prices throughout January.

Geez. Can’t a brother catch a break?

Well, at least the IPO dry spell may be over. Thanks to:

Baby formula…?

Bristol-Myers Squibb spun off its infant formula maker Mead Johnson Nutrition in a surprisingly successful IPO yesterday. The company raised $720 million and sold 5 million more shares than it anticipated in the first successful float since November… the most lucrative since April 2008.

Three other companies are set to go public this week. Mead’s float is hardly an all-clear signal to the IPO world… so we’ll see how it goes.

Even good news is bad news today. A better-than-expected supply report from the U.S. Energy Dept. sent crude oil straight to the woodshed yesterday. At $35 this morning, the light sweet stuff is down to a three-week low.

Elsewhere in the resource world, China’s state-owned aluminum producer has closed its $19 billion deal with Rio Tinto (RTP). The company, Chinalco, could control as much as 18% of Rio as a result.

Here’s an interesting detail of imploding economy: Over 3,000 cars currently sitting abandoned in the Dubai Airport.

Apparently, thousands more rest ownerless in garages across the city.

Foreign workers make up 90% of Dubai’s population. But the government, says The New York Times, is canceling 1,500 work visas every day. Over 50,000 were nixed in January alone — up 86% from January 2008.

It’s a crime in Dubai to not pay your bills… so fearing imprisonment, leagues of unemployed are buying one-way tickets out of Dubai and leaving everything they can’t fit in a suitcase — cars included.

(Side note: The Dubai government is trying to save face by passing a law forbidding the media to report anything damaging to its reputation, punishable with fines up to $272,000.)

“You guys are really getting out of touch,” insists a reader. “Why not ask Rush to comment? Either that or state clearly that you are RNC minions! That would be about as stupid as some of Tuesday’s comments. Did any of you guys ever work a real labor job in your lives?

“Let’s try an experiment. Have any of you ever talked to your grandfathers or great-grandfathers about why so many of them voted Democrat from 1932-1952? Geez, guys, give them a break. If the New Deal was such a great failure, as you allege, why did the vast majority of Americans vote Democrat for so many years? And why did America go into such mourning when FDR died? And why did the standard of living for the average American make its greatest increases ever during the Democratic administrations since 1929.

“Another fact you keep overlooking: Since 1945, annual gains during Democratic administrations: 10.6%; average gains during Republican administrations: about 6% (Fidelity Investments quarterly, January 2009). Being the economic and investment geniuses that you are supposed to be, why do you keep spouting such RNC drivel?”

The 5: Huh? The quote we ran Tuesday about the New Deal amounting to futile spending, massive debt accumulation and no impact on unemployment was testimony of one of its chief architects before the House Ways and Means Committee in 1939.

But more power to you, eh? If you’re investing according to which party is occupying the Oval Office and citing Fidelity as your source… good luck. You don’t need The 5 Min. Forecast.

“All the reckless spending your government is doing,” writes a Canadian reader, “and the inflation it’s going to create is going to have dire consequences on the rest of the world too. Just like the dire consequences the rest of the world is suffering now due to the U.S. housing and mortgage debacle.

“Seems the underlying cause of these problems is the political games that go on to win popular support. Your politicians and, in fact, all politicians in democratic countries will do anything, say anything and destroy anything to get into office and stay there.

“Almost makes you wonder if we would all be better off being ruled by a benevolent dictator who could just do the right thing and not worry about what the average voter thinks about it.”

The 5: Hmmn… benevolent dictator. Honest politician. Military intelligence. We’re fans of oxymorons too. (Emphasis on “moron.”)

Cheers, eh?

Source: Bond Bubble, Deficit Record, Trading Signals, Dubai in Danger and More!