In the wake of the Dubai default (please see Dubai Defaults - Deflation In Action - Watched Pot Theory Revisited for details), I am up watching treasury yields.



Two year treasury yields plunged to an new all-time record low as the following Bloomberg table shows.



Yield Curve as of 2009-11-27 12:22 AM







click on chart for sharper image



On Monday Bloomberg reported Treasury Sells Two-Year Notes at Record Low Yield



The Treasury sold $44 billion of two-year notes at a yield of 0.802 percent, the lowest on record, as demand for the safety of U.S. government securities surges going into year-end.



The last auction, a $44 billion offering on Oct. 27, drew a yield of 1.02 percent. Indirect bidders, a class of investors that includes foreign central banks, purchased 44.5 percent of the notes today, the same as at the October sale.



The previous low was 0.922 percent on the auction held. Dec. 26, 2008.



For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.



While the stock market is saying one thing, the treasury market says another. I know who I believe, and it's not the stock market.

Hyperinflation In Reverse

Dollar Sinks S&P Futures Down



One thing of note is that S&P 500 futures are down 14 points and commodities are down as well even though the dollar is sinking. This is a dramatically different change from the norm.



Of course this is a holiday and we must see if there is follow through. This could be a one day wonder.



The important point is that if this sticks, or if equities sink while the Yen and/or Dollar rally, the reflation trade is finally over.



Can it be that the much despised treasuries are the only thing that will rally while everything else sinks? Yes, that is entirely possible given how lopsided anti-dollar sentiment is vs. everything else.