Interest rates – or yields - on ten year bonds issued by the UK government are at the lowest level since 1703. Over the summer yields on German and Swiss two year bonds turned negative, creating the remarkable situation in which investors are paying for the privilege of lending money to governments. 

Not everyone has benefitted from this process. Despite last week's announcement by the European Central Bank of unlimited bond buying, the cost of borrowing for ten years for the Greece government is more than ten times what Germany pays.

Yet for the countries in the northern part of the euro area, and pretty much all industrialised countries elsewhere, the cost of borrowing for the government is exceptionally low.

For these countries high levels of government borrowing haven't deterred investors from buying government debt. Indeed, US ten-year bonds have risen in value by 11% since Standard Poor's downgraded America's debt rating citing concerns about the ability of the government to control the deficit.

Four factors seem to be at work.

Demand for safe assets has risen as the uncertainties confronting the world economy have risen. Investors are willing to pay a premium to insure against the risk of big declines in the value of their capital. So in the UK investors have kept buying government bonds despite the fact that interest rates on bonds have failed to keep up with inflation for four years.

Declining growth expectations in the industrialised world point to lower returns on risky assets such as equities. This process has supported demand for government bonds and, in turn, reduced yields. (The interest rate on bonds declines with rising bond prices).

Government bonds offer protection against the risk of deflation. At the end of its term investors are assured of getting their money back.

Meanwhile, the financial crisis has created powerful new sources of demand for government bonds. To counter the risk of deflation central banks have embarked upon Quantitative Easing - buying government bonds on a huge scale. In addition to that, regulation designed to strengthen the financial sector has led banks to increase their holdings of government bonds.

Japan offers a cautionary tale of how deflation, low growth and uncertainty can drive yields on interest rates to extraordinarily low levels. Over the last 20 years, Japan has experienced weak growth peppered with bouts of falling prices. Borrowing by Japan's government has soared and, relative to the size of its economy, its government is now the industrialised world's most indebted. Yet ten-year Japanese bond yields, at just 0.8%, are less than half US levels and are lower than in any country other than Switzerland.

It would be complacent to say that the cost of borrowing is unaffected by levels of government debt. Yet in an uncertain world, where growth and inflation are expected to run at low levels, government debt seems, for many investors, to be the least-worst place to put their money.  

Some commentators argue that we are experiencing an unsustainable bubble in governments. Certainly bond prices have risen at a remarkable rate in recent years.

Whether an asset price boom is sustainable depends on whether the fundamentals of the economy have changed. If we are in a new normal world of elevated risk, weak growth and low inflation, current ultra low bond yields may be here to stay. If not, bonds are heading for a fall.