Why are real-term bond yields systematically declining, and what does it mean for investors?
Keep in mind there are a couple of points to ponder here: Rates are really low. With rates being so low, unless there is deflation, it is pretty easy to see even moderate inflation of 1-2% being enough to eat the yield completely which would be why the returns are negative. Inflation is still relatively contained. With inflation low, there is no reason for the central banks to raise rates which would give new bonds a better rate. Thus, this changes in CPI are still in the range where central banks want to be stimulative with their policy which means rates are low which if lower than inflation rates would give a negative real return which would be seen as a way to trigger more spending since putting the money into treasury debt will lose money to inflation in terms of purchasing power. A good question to ponder is has this happened before in the history of the world and what could we learn from that point in time. The idea for investors would be to find alternative holdings for their cash and bonds if they want to beat inflation though there are some inflation-indexed bonds that aren't likely appearing in the chart that could also be something to add to the picture here. "On a longer time scale, the plot thickens:  It almost looks random.  A large drop in real rates in the mid-70s, a massive spike in the early 80s, followed by a slow multi-decade decline. The chaos doesn't seem to be due to interest rates.  They steadily climbed and steadily fell:  All that's left is inflation:  First, real rates should be expected to pay a moderate rate, so nominal rates will usually be higher than inflation. However, interest rates are very stable over long time periods while inflation is not.  Economists call this type of phenomenon ""sticky pricing"", where the price, interest rates in this case, do not change much despite the realities surrounding them. But the story is a little more complicated. In the early 1970s, Nixon had an election to win and tried to lessen the impacts of recession by increasing gov't spending, not raising taxes, and financing through the central bank, causing inflation.  The strategy failed, but he was reelected anyways.   This set the precedent for the hyperinflation of the 1970s that ended abruptly by Reagan at the beginning of his first term in the early 1980s.  Again, interest rates remained sticky, so real rates spiked. Now, the world is not growing, almost stagnating.  Demand for equity is somewhat above average, but because corporate income is decelerating, and the developed world's population is aging, demand for investment income is skyrocketing.   As demand rises, so does the price, which for an investor is a form of inverse of the interest rate. Future demand is probably best answered by forecasters, and the monetarist over and undertones still dominating the Federal Reserve show that they have finally learned after 100 years that inflation is best kept ""low and stable"":  But what happens if growth in the US suddenly spikes, inflation rises, and the Federal Reserve must sell all of the long term assets it has bet so heavily on quickly while interest rates rise?  Inflation may not be intended, but it is not impossible."
Imagine that the existing interest rate is 5%. So on a bond with face value of 100, you would be getting a $5 coupon implying a 5% yield. Now, if let's say the interest rates go up to 10%, then a new bond issued with a face value of 100 will give you a coupon of $10 implying a 10% yield. If someone in the bond market buys your bond after interest price adjustment, in order to make the 10% yield (which means that an investor typically targets at least the risk-free rate on his investments) he needs to buy your bond at $50 so that a $5 coupon can give a 10% yield. The reverse happens when interest rates go down. I hope this somewhat clears the picture. Yield = Coupon/Investment Amount Update: Since the interest rate of the bond does not change after its issuance, the arbitrage in the interest rate is reflected in the market price of the bond. This helps in bringing back the yields of old bonds in-line with the freshly issued bonds. Why does selling a bond drive up the yield? The bond will pay back a fixed amount when it comes due. The yield is a comparison of what you pay for the bond and what will be repaid when it matures (assuming no default). Why does the yield go up if the country is economically unstable? If the country's economy is unstable, that increases the chance that they will default and not pay the full value of the bonds when they mature. People are selling them now at a loss instead of waiting for a default later for a greater loss. So if you think Greece is not going to default as it's highly likely a country would completely default, wouldn't it make sense to hold onto the bonds? Only if you also think that they will pay back the full value at maturity. It's possible that they pay some, but not all. It's also possible that they will default. It's also possible that they will get kicked out of the Euro and start printing Drachmas again, and try to pay the bonds back with those which could devalue the bonds through inflation. The market is made of lots of smart people. If they think there are reasons to worry, there probably are. That doesn't mean they can predict the future, it just means that they are pricing the risk with good information. If you are smarter than the herd, by all means, bet against them and buy the bonds now. It can indeed be lucrative if you are right, and they are wrong. In a secular bull market, strong investor sentiment drives prices higher, as participants, over time, are net buyers. Secular markets are typically driven by large-scale national and   worldwide events... demographic/ population shifts,   governmental policies... bear market periods occur within   the longer interval, but do not reverse the trend. There are still many reasons to buy the long bond, despite the lack of yield (nearly flat term structure of interest rates). Despite the recent credit ratings agency downgrades of U.S. sovereign risk, the T-bond offers greater relative security than many alternatives.  If Germany were NOT part of the EU, its government bonds would be issued by the Bundesbank, denominated in Deutsche Marks. German government bonds would probably be a better choice than the U.S. Treasury's 30-year bond.  Long-term maturity U.S. Treasuries are in demand by investment and portfolio managers because: There is another reason why an investor might buy negative yielding bonds: if the investor expects that bond yields will go even further negative, then they are also expecting the price of the bond to go up. They can resell the bond later at a profit. As an example, they may expect an increase in central bank bond purchases to drive yields lower and prices higher. I'm not too familiar with the Bank of England's objectives, but it seems similar to the FED's QE program. The interest rate the BOE sets, similar to the FED rate, affects mainly the short term (the left side) of the [interest rate curve](http://www.bankofengland.co.uk/statistics/pages/yieldcurve/default.aspx). However, in order to bring down intermediate and long term rates, central banks will buy intermediate and long dated government and corporate bonds. The government's added demand will drive those bond prices up, which will drive yields down.  But like I said, I'm not too familiar with the BOE's bond purchasing program, so I could be way off base here. Your question asked about a specific time the yield curve flattened or inverted.  There are other times when the yield curve inverted or flattened.  You also imply in your question that investors were flocking to long term bonds which lowered their yields.  I don't believe this is the case.  I believe investors were fleeing from short term bonds causing the yields on short term bonds to rise to meet those of long term bonds. The chart below shows the history of yields on US bonds over time.  The shaded areas are where the yield curve flattened or inverted.  Notice that after 1982 it is the short term yields that rise sharply to meet or cross the yields on longer term bonds.  The yields on longer term bonds move little compared to the movement in yields on the short term bonds.  Thus it is investors moving out of short term bonds that cause the yield curve to flatten or invert.  These investors are not moving into longer term bonds since the yields on the longer term bonds do not move much at all at these times.  In fact, in 2006 the longer term bond market was only 25% of the total US public debt while short term bonds made up 75%.  It would take less money to move the yields on longer term bonds than it would on short term bonds yet the longer term yields did not move near as much as short term yields.  So why are investors or banks moving out of short term bonds causing their yields to rise?  I believe this happens for one of two reasons:  they are moving into higher yielding investments or they need to raise cash to cover bad investments.  Charts and more information here. Long-term bonds -- any bonds, really -- can be risky for two main reasons:  return on principal, or return of principal.  The former is a problem if interest rates are low (which they are now in the US) because existing bonds will fall in price if interest rates rise.  The second is a problem if the lender defaults: IOU nothing. No investment is riskless.  Short-term bonds command a lower interest rate than long-term bonds (usually) because of their quicker maturity, but short-term bonds carry risk just like long-term bonds (though the interest rate risk is lower, sometimes quite a bit lower, than for long-term bonds). One reason that a bond can be significantly less than face value is because people are seeking better investments elsewhere, so for example if a bond doesn't mature for another 10 years, that 20% increase in face value isn't very attractive when compared to say leaving your money in the stock market for 10 years. Another reason could be that the credit-worthiness of the issuer has collapsed and people expect that there is a fairly good chance they are not going to make the payment. This could be what you would see if for example it was a one year time until maturity, but it has a value of 40% of the face value. There is a risk, because they can simply not pay. For example people who bought Greek bonds.