This is what happens when the fed is running out of “ammo” and treasuries are already priced for almost zero yield globally. I don’t think treasuries are going to crash, and they may have a little further to go, but if the market keeps crashing, I don’t think anybody can count on bonds to act as a viable asymmetric hedge as they have for the last 40 years from here on.
And yes, that’s a major problem and will further exasperate volatility and drawdowns in equities. The amount of $ allocated to leveraged bond / equity portfolios (risk parity, CTA, pensions, etc) is enormous, and they have been reliant on the correlation between bonds and equities being inverse in times of risk. What happens when that inversion flips because bonds simply don’t have that much further to go and no longer have a positive carry cost? Those levered entities suddenly are forced to de-lever.
One small anecdote that I think few are aware of is the fact that during the great depression, treasury bonds also dropped with equities. They dropped far less, and actually earned a positive real return due to deflation being so intense, but they did not rise as people would expect in recent market history.
h/t cbus20122