Axel Merk, who apparently runs Merk Hard Currency Fund, says in his commentary on May 25, 2011, "At this stage, the U.S. government may roll existing debt, but cannot issue new debt. This has created a situation where fear may be spreading that there simply won't be a large enough supply of debt to meet investor demand. While this sounds like an odd problem to have, we have recently witnessed a rather unusual level of investment flows, with money piling into Treasuries. As of this writing, investors receive a paltry O.O4% annualized return on their money for giving Uncle Sam a 3-month loan. That's a third of the yield available at the beginning of the year, when 3 month U.S. Treasury Bills yielded an annualized 0.12% (already a severely depressed yield.)"
He goes on to say, "In the U.S., managers of money market funds and other vehicles that provide investors a high degree of liquidity, rely on the U.S. Treasury market. Regulations and practicalities make Treasuries the instrument of choice for a great number of cash management transactions...."
So when money managers have too much cash on hand like now after they sold equities, it appears they buy Treasuries. With no new supply of Treasuries while debt ceiling is stuck at what it is, supply of existing Treasuries may be too little to satisfy this demand by money managers, driving down yield.
If the equity market really tanks, yield may go even lower. I think yield will only go higher when Treasuries have competition from foreign debt instruments, which means the rate may not go up much until U.S. dollar loses its reserve status. End of QE2 may also help raise yield by decreasing money available to these money managers. JMHO