U.S. treasury bonds could be the next bubble to burst. Fears over the economy have driven investors to the perceived safety of the T-bill. But with high prices and low yields, treasury bonds bear all the hallmarks of a bubble.

Chinese Premier Wen Jiabao fueled fears that treasuries may be the next bubble to burst at his annual press conference last Friday when he said, “We have lent a huge amount of money to the U.S., so of course we are concerned about the safety of our assets.”

Warren Buffett warned that the bonds were in a bubble in his annual shareholder letter last month.

But even if the bubble does not burst immediately, the danger to the U.S. economy will only increase. W. Joseph Stroupe writes for Asia Times Online:

Much discussion and debate is currently underway as to whether the U.S. will find sufficient global demand for the more than $2 trillion in new treasuries coming online this fiscal year alone. But the fundamental risks for the dollar aren’t only arising out of that fear over whether demand for treasuries will be sustained.Serious risks for the dollar also arise if global demand for treasuries is sustained. Why? Because that would only thrust the present treasuries bubble to even more gigantic proportions, further warping the structure of the already severely deformed present global financial order, magnifying the dangerous distortions that already exist and increasing the likelihood of a massive second wave of damage and destruction in this present crisis, and an eventual burst in the treasuries bubble.

Stroupe argues that the U.S. is sucking all the air out of the global credit market as the treasury bubble gets bigger—which means other companies and nations cannot get the cash they need. If this continues, he asserts, the situation will only get worse, causing a second wave in the credit crisis. Stroupe writes,

That second wave, if it comes, will also carry profoundly negative repercussions for the treasuries bubble itself, because the U.S. and Europe will be plunged into undeniable, full-blown depression via a financial meltdown by the heavy burden of the cascading effects of default in Eastern Europe. That eventuality will force global investors to finally begin to evaluate the safety and appeal of treasuries and the dollar based much more on the swiftly disintegrating fundamentals of the U.S. economy and much less on a psychological reflex, driven by extreme risk aversion, that at present corrals investors into treasuries for their supposed safe-haven benefits. …Investors will begin to stampede out of financial assets such as treasuries and into hard assets like precious metals and certain commodities whose price has been severely beaten down. These will offer comparatively much safer stores of wealth, ones with a real profit potential. China, via its resource buys, is already blazing the trail, going energetically into hard assets, rather than sustaining its 2008 rate of purchases of treasuries and other financial assets.

The dollar may be strong momentarily. But no currency or system based on so much debt can last; watch for a resulting dollar collapse. To learn of one possible alternative to U.S. treasury bonds, read “Could a Euro Bond Supplant U.S. Treasuries?”