Our backyard has many amazing things, but this one had me puzzled for quite awhile. However, I think I may have found the answer to what exactly this is:
Until I sat down and really looked at this carefully, I thought it was a cocoon. When I magnified the image it was quickly apparent that it was many cocoons crocheted together into a dangling mass. After some extended searching, BugGuide again came to the rescue. Not only did they provide a solid lead to the identity of these little Q-tip wannabes, but one commenter came up with this link to a video. (Viewer discretion advised.)
It appears that an unfortunate caterpillar was parasitized by wasps which laid eggs on or in it, which happily developed into larvae inside the caterpillar, but carefully avoided killing it. Then they cut their way out, paralyzing the caterpillar temporarily, and entering their own cocoon stage. However, they may not have been done with their host just yet. In some cases, the parasites somehow have enough control over the host’s behavior to force it to cover the wasp larvae with a protective layer of silk and even physically defend the mass of cocoons from attack by other wasps, until the host dies.
Consider this “Gruesome caterpillar stories: Vol. 2”.
Life ain’t easy out there, folks.