Then, something changed. Since the end of the last market turmoil in December of 2011 something strange happened, the VIX sold off, but the TLT did not. The spread between TLT and VIX has widened and widened. Where in every other crisis the spread should have stretched to near 80 and then eased back to 70 or so, the VIX has eased, bonds have not.
While certainly some of this is "Operation Twist" affecting the spread, I think something else important has also changed. Money is flowing out of Europe and into U.S. debt. The big money NEVER moved a chunk of its cash back into the markets (something else that makes this rally so remarkable). Yet, the equity markets have never priced in the major moves that the bond markets are pricing in. To put it simply, TLT is priced like the S&P is in a crash, while S&P options (as measured by VIX) are priced just about at the long-term mean of the market.
Something has to give. Either the bonds have to come in or the VIX needs to explode. The VIX had been on a consistent downtrend throughout the year (and I still think it will be going much lower by year's end).