The Treasury complex is seeing yields (and curves) compress dramatically today. With 5Y at all-time low yields and 30Y rallying the most in three months, the divergence between stocks and bonds appears ever more glaring. 30Y (which just went positive YTD in price) has traded around the 3% yield mark for much of the last 4 months (around 120bps lower than its average in Q2 2011 - pre-US downgrade) and most notably curve movements (as the short-end becomes more and more anchored to zero) have been dramatic. 2s10s30s is now at almost four-year lows and the last four times we saw equities diverge (up) from bonds' sense of reality, it has been stocks that have awoken. Back of the envelope, 2s10s30s suggests that the S&P should trade around 1100 (as we test 1300 in cash today).
30Y Treasury yields have dropped over 10bps today, equal to their biggest drops of the last three months as while volatility remains, the 30Y yield has oscillated around 3% for much of the last four months (around 120bps from the pre-US downgrade levels).
Each of the last 4 major divergences between stocks and the Treasury complex (in this case we use the common carry driver 2s10s30s butterfly) the equity market has converged back to the bond market's reality. Eyeballing the chjart shows that we started to converge right before the LTRO and that provided another nominal jump in price for equities (in mid-to-late Dec). Today's rally in Treasuries has flattened the curve even more and pushed 5s10s30s negative and 2s10s30s near its local lows (which take us back to late 2007 levels).