Amazing how the tables can turn so quickly in a span of just six months…

In 2008, Treasury bonds were the only fixed income category to post a profit amid total market chaos as investors shunned riskier debt. In 2009, Treasury bonds are the only fixed income sector in the loss column while riskier bonds have skyrocketed in value.

In 2009, benchmark ten-year T-bonds are down 2.6%, including interest income while 30-year T-bonds have plunged 15% -- their worst calendar year of performance since 1994.

Back in December the yield on the benchmark ten-year U.S. Treasury bond yielded 2.25% -- the lowest effective yield since the mid-1950s. Driven sharply lower by deflation fears, bank insolvencies and the rush to liquidity, investors drove yields down to absurdly low levels.

But starting in January the trend in Treasury bond prices had already shifted to a gradual ratcheting in interest rate premiums on expectations the Treasury would flood the system with record bond auctions. And flood the system it did; in 2009, Treasury is projected to issue a cumulative $2 trillion dollars’ worth of Treasury securities. With the exception of short-term bonds, Treasury is struggling to sell the longer end of the yield curve as inflation and supply fears mount.

The ten-year benchmark is important because it sets the tone for mortgage rates and consumer loans – something the Fed is trying to wrestle to lower levels to boost mortgage financing and consumer installment debt.

What’s even more alarming about this bear market in longer dated T-bonds is the fact the Federal Reserve has failed to influence long-term rates despite spending more than $125 billion dollars’ worth of Treasury bonds this year.

In other words, Bernanke is losing control of the yield curve, or the difference between short-term and long-term interest rates. That’s an important relationship because the economy is still deflating, loan growth is anemic and domestic consumption is barely growing since last fall. Yet the market is growing increasingly tired of the flood in Treasury issuance and still driving long rates higher. This is a bad sign for the economy, the Fed and consumption. The economy can’t handle higher rates, particularly in the mortgage area.

But if the economy is expected to post a sluggish recovery later this year then maybe Treasury bonds are a good speculation at these bombed-out levels. Benchmark ten-year T-bonds start looking attractive again north of 4%, especially if the economy posts another contraction in 2010 following the exhaustion of Obama’s $787 billion dollar stimulus plan – now hitting the real economy.

It’s pretty hard to make a strong case for a sustainable corporate earnings recovery in this environment because these are truly uncertain times. The consumer is finally out of the game, focusing on frugality, rebuilding his savings and certainly not looking to take on more debt. And the government cannot continue legislating spending packages without inviting some serious inflationary consequences.

In the absence of organic domestic consumption supported by rising employment – which is not the case now – just how is consumer spending supposed to meaningfully improve?

U.S. Treasury bonds and German bunds have both been mauled over the last four weeks. Yet I suspect these securities will offer some of the best and safest returns later in 2009 or 2010 as the global economy heads back into the gutter, starved for a new round of stimulus spending.

Bonds anyone?