I've had the same thing happen to me, except it was a Pyro that was cloaked. However, everyone else saw him just fine.
I think it's a graphical glitch.
I wouldn't mind the spies' 10 second cloak if it recharged faster.
Someone correct me if I'm wrong, but does your cloak recharge faster if you backstab someone?
I spend roughly 20-25 hours a week playing this game, since I'm not getting very many hours at work. However, once school starts, I'll only be playing a few hours a week, if at all.