As currencies expert Alex Merk of Merk Mutual Funds wrote recently, “Russian President Medvedev suggests the dollar is on its way out; Russian Finance minister Kudrin says there is no substitute for the dollar. The Chinese see a need to diversify out of the dollar; the Japanese say their trust in the dollar is unshakable.” What’s a poor investor to think?

Merk says Russia’s and China’s – along with fellow BRIC nations India and Brazil – concern over the stability of the dollar and their need to diversify out of dollar-denominated assets is a strategic perspective. As he rightly points out, “There is simply no substitute for the U.S. dollar today; no other market is as deep and liquid, or able to absorb the cash that needs to be deployed by central banks around the world.”

Does this mean the dollar is safe and sound? Not by a long shot. This, again, from Merk:

[We] believe countries around the world are racing to put the “tools” in place to be less dependent on the US dollar. In Asia, for example, after the 1997/1998 financial crisis, Asian countries realized they needed to bolster their countries’ reserves. In the latest crisis, they realized that holding almost exclusively U.S. dollar reserves was a risky strategy. The solution is all too obvious, namely to develop domestic markets. This isn’t just about developing domestic consumption to create a more “balanced” world economy, this is about creating domestic infrastructures, fixed income markets in particular. Currently, many global investors invest in Asian markets by buying US dollar denominated securities plus derivatives. This makes Asian issuers – governments, supranational and corporate issuers alike highly dependent on the US dollar. This will only change if global investors have confidence in the stability and maturity of the local markets. The message to “CEOs” of countries around the world is to show that they are open and ready for business. Such trust is not earned overnight. In Asia, Singapore is a leader; not surprisingly, Singapore has a healthy domestic fixed income market. China is on its way, but needs to do more to provide access to its domestic markets.

It other words, global diversification away from the dollar may not happen today or tomorrow. But the risk to the dollar – and to long-term US economic growth – is real.

Notes readers may want to do something about diversifying their portfolio allocation to hedge against this outcome. As usual we recommend considering beefing up the hard assets side of your portfolio and adding TIPS into the mix, too.

If you’re serious about investing in hard assets, we highly recommend you read this special investor report from Crisis Trader editor Christian DeHaemer on what he calls the “Great Red Oil War.”

Of course, you could also choose to trade currencies directly. For information on how to follow master forex trader Bill Jenkins to currency trading profits, click here.

U.S. Treasury bonds, the only asset in the world appreciating along with the dollar and the yen since mid-July, have skyrocketed in value since November 18. The yield on the benchmark 10-year Treasury now fetches just 2.54% – the lowest yield since 1954.

Even more incredible is the yield now offered by short-term government bills. It’s possible that yields might even turn negative before the day is through. The last time T-bill yields turned negative was in the 1930s; a negative interest rate implies investors are paying the government to park cash and not the other way around.

Evidence of heightened investor fears reached a nadir this morning with 30-day and 90-day U.S. Treasury bills yielding only 0.10%, or ten basis points – the lowest such yield since the 1930s. And six-month T-bills now yield a meager 0.20% – also in the record books.

The great paradox about the credit crisis at this stage is how investors continue to lunge after super low yielding T-bills and T-bonds when an entire gamut of fixed income markets – many with implicit government guarantees – are yielding north of 7%. Investors are indeed pricing in a serious deflation.

The U.S. 30-Year Treasury bond now yields just 3.04%, also trading at a 53-year low. Why would someone give the government money for 30 years at these rates? Short of a full-blown Depression, which I don’t think will occur, long-term bonds are the most overvalued asset in the world leading up to over $1 trillion dollars worth of Treasury bond issuance in 2009 and probably more in 2010. The only reason why an investor would buy this paper now is because of imminent financial Armageddon.

Meanwhile, investors are paid to take risk. And the values now in high quality investment grade corporate bonds, agency bonds, TIPs and convertible bonds are just too compelling to ignore. These markets all crashed starting in mid-September but have started to recover nicely over the last three weeks while stocks gyrate like a yo-yo. A 7% yield today seems mighty sweet.

Financial Armageddon is still a possibility. Global central banks and governments have spent trillions since August 2007 attacking clogged credit arteries, but only with limited success. At some point, however, I truly believe central banks will restart credit markets again as coordinated policy finally begins to work. Credit markets will unclog.

Tired of trying to pick a bottom in the stock market? I am. I have no idea where stocks are heading from one day to the next amid intense volatility. But I do believe high quality fixed-income securities should be purchased at these attractive levels for long-term investors. The values are too attractive to ignore.

Also, assuming stronger credits have stabilized at this point, investors can buy this sector without the dizzy volatility associated with common stocks, which ultimately lead to ulcers anyway as new lows are violated following every rally since last October.

Source: 30-Day and 90-Day T-Bill Yields Plunge to just 0.10%