Now, you could and should be worried if this thing looked like a great bubble -- if long-term rates looked unreasonably low given the fundamentals. But do they? Long rates fluctuated between 4.5 and 5 percent in the mid-2000s, when the economy was driven by an unsustainable housing boom. Now we face the prospect of a prolonged period of near-zero short-term rates -- I don't see any reason for the Fed funds rate to rise for at least a year, and probably two -- which should mean substantially lower long rates even if you expect yields eventually to rise back to 2005 levels. And if we're facing a Japanese-type lost decade, which seems all too possible, long rates are in fact still unreasonably high.
The long Treasury market is thinner than many people think: it is not completely implausible to argue that it is giving us the wrong read on what market expectations really are because long Treasuries right now are held by (a) price-insensitive actors like the PBoC and (b) highly-leveraged risk lovers borrowing at close to zero and collecting coupons as they try to pick up nickles in front of the steamroller. And to the extent that the prices at which businesses can borrow are set by a market that keys off the Treasury market, an unwinding of this "carry trade"--if it really exists--could produce bizarre outcomes.
Bear in mind that this whole story requires that the demand curve slope the wrong way for a while--that if the prices for Treasury bonds fall carry traders lose their shirts and exit the market, and so a small fall in Treasury bond prices turns into a crash until someone else steps in to hold the stock
PBoC I translate as "People's Bank of China."
And what about the possibility of a fall in prices forcing speculators to sell and causing a further drop in prices? If you think that is implausible, I've got some houses to sell you at 2006 prices.