Despite talk of an imminent sharp rise in interest rates, the yield on the 10-year Treasury note is back below 2%. This is more evidence that the much vaunted “Great Rotation” out of bonds has yet to occur. (Otherwise, bond prices would have fallen and yields would have gone up.)

The great rotation was always more myth than reality. In fact, the fuel for the equity rally has been coming out of cash, not out of bonds being sold. We had more evidence of that last week. Fund flows for the week ending March 20th were up another $2.6 billion for stocks, a slowdown from previous weeks, while bond flows were substantially higher, up $3.7 billion on the week, according to BlackRock data.

Normally, when the economy is improving – even if  the pace is relatively slow – that environment should support interest rates rising. But right now there are two important structural factors supporting bond prices:

The Fed is continuing its asset purchase program. First, and most importantly, the Fed is likely to continue its current pace of asset purchases at least through mid-year. Furthermore, as indicated in the Fed’s latest statement, even it does decide to pull back, this is likely to happen via a reduction of bond purchases, rather than a cessation of the program.

A dearth of new supply of bonds. In addition, however, the other factor supporting bonds is the fact that supply is relatively low. With the private sector deleveraging, overall net new issuance is down substantially from pre-crisis levels.

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