The U.S. Treasury bond market has come to receive serious attention in recent trading. When Treasury bonds show action, so does the dollar. If we see a decline in prices for long-term Treasury bonds, the dollar sinks. According to a March 2009 Fed’s Flow of Funds Report, there are $14.5 trillion in Treasury securities, agency securities and mortgage-backed securities outstanding.

Foreign countries are heavily invested in U.S. debt as an investment with China being the first holder of U.S. bonds. More than a few economists believe that if China stops buying them, the U.S. economy would face ever increasing interest rates to make U.S. debt more attractive.

With the consequence of huge deficits and out of control government spending, the real value of U.S. Treasury securities are the focus of increased attention. China wants their assets safe and if any question of U.S. credibility would ensue, the pressure to liquidate a portion of their U.S. assets in self-survival mode may seem a likely option.

If China and other nations refuse to buy U.S. debt, the only alternative is for the U.S. Treasury to purchase Treasury securities which would dramatically increase the money supply. To attract investors, interest rates would need to rise. As is the case, when the Fed starts buying Treasury bills habitually, inflation ensues. The Fed in the mid-2009 scenario has used much of the money to buy over $500 billion in mortgage backed securities.

In a normal economic environment, higher interest rates would be associated with the central bank as they try to cool off inflationary pressures associated with an expanding money supply. However, with less demand for Treasuries, higher interest rates to attract buyer demand is the only viable recourse. Yet higher interest would only push an already declining economy, deeper in the hole. Higher interest rates mean a greater burden on the populace resulting in more mortgage defaults and negative pressure on consumer debt.

Washington’s record breaking Treasury offerings to fund the deficit and the Fed buying the debt through its spinning out of dollar bills is staggering. The floodgate opened by the U.S. Treasury is pushing bond yields higher. Bill Gross, of PIMCO told Bloomberg, “The market is beginning to wonder who is going to be buying these bonds.”

Inflationary deficit spending can destroy a nation. The renowned late economist, Milton Friedman warned that “Inflation is a disease, a dangerous and sometimes fatal disease that, if not checked in time, can destroy a society.”

China remains the number one holder of U.S. debt. Milton Friedman warned, “The Fate of a Country Is Inseparable From the Fate of Its Currency.” Climbing interest rates and inflation scare an already fragile domestic and global economy. As such, the debt onslaught is boosting bond yields as the appetite for money to finance the government’s budget deficit shows no sign of dieting.