For the past while, central bank intervention (buying treasuries) and banks' excess reserve boosting is what causes the huge demand for treasuries, and dropping bond yields.
In this case, it's not “smart money” causing low yields, but intervention. What's interesting is that the resulting yields then communicate a message back out to the market:
Looking forward (10 years), economic growth and business returns will be so poor/risky that you're better off getting a risk-free 3% return in government bonds. If reasonable returns (5% to 15%) could be expected from business, nobody in their right mind would park away money for only 3% yield.
Everyone in the market hears this message, and reacts. Business leaders, pension funds, banks, and individuals all hear this message and start to adjust their behaviours.
This is a scary message, and it can become a self-fulfilling prophecy within the domestic economy. Outside the USA, it could be another story but I don't believe in total de-coupling.
American banksters and their economist cheerleaders keep looking at Japan and shaking their heads. “If only the Japanese had really aggressively printed money, and risked hyperinflation,” think the banksters, “Japan could have been a great place to do business”.
Over the years I have increasingly understood why bankers are so eager to inflate and risk hyper-inflation. Bankers really hate the idea of stagnant growth. In their eyes it's better to have outlandish returns, even if it results in destruction, than it is to have “nothing happen”.
This is why Sir Alan Greenspan was willing to turn the American home into an ATM, even though it risked destroying the country. The guys at the central banks want inflation – they are not here to fight inflation. All of the banking industry's income (lending, underwriting, M&A, derivative trading) requires growth or the perception of growth through rising prices, like we had in 2003-2007.
The central banks of western countries are in a very tough spot (self-inflicted, by the way). They want to print money through purchases of bonds, but this activity depresses bond yields and tells the market that the economy is unhealthy and not worth investing in.
What scares me is how hell-bent the banksters are on high growth and inflation. This will lead them to do stupid things in the mistaken belief that they can engineer a perfect economy. We will likely see dramatic swings up and down in growth over the next 10-20 years. In the end, I believe we'll essentially have a sideways market with very poor long term returns, and a much weaker US Dollar.
- Perpetual Bull