Who's Afraid of the Flight to Safety?

We know that yields on government debt from Spain are pushing new record highs as their banking woes intensify. Italian,Spanish, and even Frenchbondrateshave beencanaries in the coal mines of Europe's financial crisis as they telegraph the riskiness of these countries and their propensity to disappoint investors with loss of principal should they collapse, in or out of the eurozone.

But the realeye-opener lately has been the "flight to safety" in the government debt of the US, Germany, and Switzerland. Today, US 10-yr Treasury Notes hit a record low yield of 1.53%. And I was getting worried when they hit 1.7% a week ago.

In Germany last week, 2-yr bunds were snapped upfor a measly0.07%. And their 10-yr bund is trading at a new record of just 1.21% today.

Finally, I'm hearing that Swiss 2-yr notes are trading negative. That's right... asset managers eager to get into the traditional safe-haven currency are willing to pay the Swiss government just to hold their money for them.

The extremely interesting tension here is that the Swiss do not want a stronger franc and have been intervening for overnearly a year to keep the EUR/CHF exchange rate above 1.20 by selling francs against euros. When that effort "snaps like a twig" as the euro continues its slide,thefranc could soar anyway against all intention of the Swiss National Bank (SNB).

Forsome recenthistorical perspective, itis worthnoting that US T-bills were bid to negative yields in 2008 during the height of the credit crisis. Why? Again, if you are a large asset manager with piles of cash to park somewhere during a banking meltdown withcounterparty risk everywhere, whoya gonna call? Uncle Sam, that's who.

So, my questionsare these...

Are big investors overreacting in fear? Or is there truly another major "credit event" on thehorizon?

Are they just being cautious, or could this "institutional bank run" become self-fulfilling?