"I am no expert on swaps (to put it mildly) but it sure seems like the current move is driven by something other than fundamentals."

Brad Setser hits the Trifecta:

"Treasury yields aren’t hard to calculate. But they are still my favorite indicators of the scale of the current crisis. The fact that so many are willing to lend so much to the US Treasury for so little is a clear indicator of a lack of confidence in other financial asset. Dr. Krugman is right. Market analysts are more or less saying the same thing: ““Where the credit markets are trading, it’s all but implying a 1929 scenario,” said Joe Balestrino, fixed income strategist at Federated Investors”

That's right. Investors are buying bonds with basically no interest in order to avoid risk, and hedge against deflation. Make sense?

"Suffice to say that surge in Treasuries — and rise in credit spreads — isn’t a good sign. Investors (including central banks) aren’t willing to accept anything that just has an implicit government guarantee — let alone debt with real risk. Right now they want nothing less than the full faith and credit of the US government."

That's right, they won't lend money to corporations ( Buy bonds ), slowing the economy, by reducing lending and causing the interest rates that these corporations need to offer to get a loan to skyrocket.

"I am no expert on swaps (to put it mildly) but it sure seems like the current move is driven by something other than fundamentals. A negative swap spread — according to the FT – implies that “investors are somehow reckoning that they are more likely to be paid back by a private counterparty than by the government.” That doesn’t seem consistent with what the rest of the market is telling us …"

I agree. There's a total disregard for fundamentals because of the Fear and Aversion to Risk. It's a downward bubble, if you will.

Now we need to figure out how to combat it. One way, according to Buiter, is to force banks to lend, however fearful they are. Rebecca Wilder and I favor cutting taxes. We'll see.