The negative yield phenomenon which has become a feature of around 25% of the world’s outstanding public debt issued by governments and corporations - the quarter share representing US$15 trillion of that global debt stock - is one of the most apparently perplexing items ever to have appeared on the capital markets’menu.

Moreover, to add to that unsavoury dish, the inverted yield curve is also being served up as a side: three developed economies in the AAA-single A ratings space now dine on inverted yield curves, while eight do so on partially inverted curves and 10 on minimally inverted ones.

I suspect all of this would cause one to be an uber-bull on bonds - that is unless the rates dynamic gets overtaken by the credit dynamic, in a scenario where widespread default manifests as the result of a swooping economic recession - or better (worse) still - another Great Depression.

The behaviour of long-end yields and the widespread curve inversions which have recently appeared briefly in the US Treasury market, UK Gilts market, German Bunds market and Japan’s JGB market - manifesting as a “bull flattening”at a point where rather than inversions resulting from a central bank short-term rate rate tightening cycle the inversion is driven by yield compression at the long end - suggests markets believe something very nasty lies ahead.

But then again, maybe not. There are many elements which have been contributing to the above phenomena. The global carry trade, whereby investors can fund at ultra-low rates and reinvest in the debt markets at long tenor for a positive yield carry, remains ubiquitous.

That is a powerful contributor to the inversion dynamic and deep long-end yield compression, and might well explain the substantial rallies we have seen in numerous emerging market bonds this year.

More than that - the US Treasury bond market is one of the major targets of the carry trade, thanks in part to a reduced cost of hedging US Treasury bonds against foreign exchange risk, and the prevailing strength of the dollar might well be explained by the demands of that trade.

Then, of course, there is a deep low rate culture imposed by a range of central banks globally, aided by quantitative easing, which has filtered through in the form of long-end bull markets in government bonds, and a debt issuance explosion as the result of lower benchmark yields and compressing credit spreads.

In the latter case, from the point of view of the credit element of the debt proposition, it’s perhaps disturbing that recently the total amount of negatively-yielding corporate debt recently surpassed the US$1 trillion mark, particularly given the fact that this market has exploded over the course of this year from issuance totalling just US$20 billion in January.

I have little doubt that although there remains a structural bid for long duration debt thanks to the need to meet long-term liabilities with assets at pension funds and insurance companies - even at negative yields, it’s simply meeting their corporate charters - there is a vast universe of long duration players who are simply in it for the bond price appreciation brought about by further moves into deep negative territory.

And the aggressive short-term discount rates currently prevailing - particularly those in the negative realm - which are used to present value bond prices impart high levels of convexity to long duration bonds, meaning there is every incentive to pile in, as bonds prices in those circumstances behave more like equity prices and offer potentially spectacular upside returns.

For that reason, I would be going along with this freakish debt market for now. The long-term trade that screams out to be put on is a duration-weighted barbell, with price action to be led by both the rush into long end duration and the looming effects of central bank easing at the short end, where both the US and German short-term government bond yield curves appear too cheap relative to implied government monetary policy.

In the shorter term, bear flatteners anticipating further curve inversions, or a move into absolute inversion, appear attractive, as government monetary policy lags long-end price action.  

I reckon it’s quite possible that long-end US Treasury yields may well end up in negative territory, much as Alan Greenspan admitted in a recent interview, where he downplayed the significance of the phenomenon as “just another level.”

Certainly running with the debt markets on the basis of a basically bullish scenario that applies across a plethora of countries - even in negatively-yielding jurisdictions - thanks to the rate element and long-end duration/price effect, appears eminently sensible.

But if the focus tips to credit and the outstanding debt pile of governments and corporations in the face of economic meltdown, bets would have to be quickly withdrawn from the table.