Your #1 argument is very good. Foreign central banks (especially the PBoC) have been very aggressive buyers of Treasuries, in order to prevent their own currencies from rising against the dollar. Interest rates would certainly be higher if not for their intervention. How much higher I don’t know, and I’m pretty sure nobody really does.
However, there is still a lot of private money pouring into long-term bonds. They may be wrong (maybe they’re just pension funds on autopilot, supposed to invest a certain percentage of assets in bonds). But they’re there, and it would be arrogant of us to dismiss them all as dumb money.
Also, let’s make one thing clear: this is not just a short-term “flight to quality” thing. First of all, long-term rates have been quite low for awhile (the Greenspan conondrum), since way before the current crisis. Second, “flight to quality” means that investors pile into cash (aka very short-term Treasuries), not long bonds. If you are hoarding cash, you buy 3 month or 6 month T-bills. Not 30 year bonds or 10 year notes.
So I think the bond market really has low inflation expectations, as strange as this may seem to some here. I happen not to share those expectations (I posted recently on another thread that I have no money invested in bonds), but I do acknowledge them.
