VIX and More points out:
The low yields on U.S. government debt have several interesting implications. One implication is that a falling VIX does not reflect the action in the government bond markets. Another implication is that rising yields will indicate when money is starting to flow out of safe haven investments toward higher risk investments such as stocks. Finally, when the bulk of those currently holding government debt decide that it is appropriate to redeploy these assets into stocks, the pent-up demand for equities will be a formidable factor to reckon with.And this is precisely what has happened since the credit crisis began last summer, specifically Treasuries have rallied (lower yields), while equities have sold off.
This pattern changed over the last week. Yves at Naked Capitalism is puzzled by:
Long dated Treasuries rising (a deflation signal) as stocks stage a dramatic rally.
She does note that it isn't necessarily just deflation being priced in, but also:
- Short covering of Treasury shorts embedded in structured products to "reduce" their cost
- Shortening of Mortgage Backed Securities required bond investors to buy Treasuries to add duration