The following chart from Dylan Grice does a good job of demonstrating, once and for all, what is going on in the bond market.
And speaking of bond markets, a few hours ago the German debt agency announced that it will for the first time ever, issue zero coupon 2 year bonds, which as the name implies will pay zero cash interest. In other words, Germany, sick and tired of being the only good cash collateral in Europe, is gradually halting the payment of any cash interest on its paper. After all: why should it?
Germany will for the first time sell two-year bonds on Wednesday that won't make scheduled interest rate payments, a ringing endorsement of the safe appeal of German debt and a reflection of increased market nervousness over the composition and direction of the euro zone.
The German federal government Tuesday set a zero coupon on a new issue of two-year federal Treasury notes, or Schatz. Germany will auction €5 billion ($6.41 billion) of the two-year note on Wednesday.
While other countries have sold zero-coupon bonds in the past, these offerings were designed as such to meet demand from a certain group of investors rather than being a reflection of a country's slumping borrowing costs.
In contrast, a zero coupon on the new German note underscores a surge for safety, which has pushed yields on bonds perceived to be safe sharply lower. Investors are so nervous about the potential loss of capital that they are willing to forego interest rate payments just to protect their money by parking their funds in German debt.
Coming soon to a market near you: negative interest bonds, where one pays the government for the privilege of holding repoable collateral. This is not a joke.