U.S. bonds collapsing! Foreigners abandoning dollar!

In the two days after the Fed's rate cut, the price of the long-term Treasury bond plunged more than two and a half points, including the worst single-day plunge since September of 2003. This means bond yields, which move in the opposite direction, have surged.

Second, if this trend continues, 30-year fixed-rate mortgage rates, which follow long-term Treasury yields, will also surge — precisely the opposite of what the Fed had hoped.

Third, all this could lead to higher mortgage rates across the board — both on the higher risk subprime mortgages and on the supposedly lower risk "prime" mortgages.

According to textbook theory, this wasn't supposed to happen! But it is happening. Why are Treasury yields surging (and their prices plunging) even while the Fed is cutting its interest rates?

It's primarily :

• Because foreign investors hold over $7 trillion in U.S. dollars, mostly in U.S. Treasuries …

• Because they're taking a beating in dollars and starting to dump them …

• And because when they dump their dollars, they have to dump their U.S. bonds along with them. Heck, even before the Fed's latest action, demand for U.S. bonds was down a staggering 80% in just one month, with the biggest selling coming from overseas.

Now, the U.S. Dollar Index has fallen well below critical support levels to within a fraction of a point of its lowest level in history and signaling even more dramatic declines ahead.

Now, gold has spiked to over $735 per ounce … oil has surged … food, water, industrial metals, construction materials and just about every other natural resource you can name is soaring in price.