Imagine handing over your money for the next years and being offered 0.23%. Or being happy with 1.47% for five years. Or 2.73% for an entire decade.

But that’s exactly what gobs of investors are doing this week – rushing into US Treasuries (government bonds) – which they perceive as the safest haven in a brewing storm. In fact that was the big story this week, as stocks wobbled and the bond market was swamped. Demand for bonds pushed those yields down and prices up.

Now most people have absolutely no idea how the bond market works. That’s okay. You don’t have to. Neither does the media. The bond market is a dozen times bigger than the stock market and affects your life far more. Normally bond prices fall when interest rates rise (since existing bonds become less valuable). But right now demand for stuff that is considered safe and pays a return is so high that prices are rising – which means yields are falling. (I told you this wasn’t simple.)

An example, those preferred shares I adore, especially the ones issued by blue chippers like banks and insurers. These are like mini-bonds that pay a dividend four times a year and react to rising interest rates like bonds themselves, by declining a little in value. But not these days. So many people are desperate to get preferreds that prices have risen, even as the Bank of Canada nudges rates higher.

As a result, yields on preferreds have dropped from about 6.2% a few months ago to 5.8% now. And still demand is intense. (And why not? These things pay three times GIC rates and have 80% less tax, as I keep reminding you.)

So, bond yields are falling. Preferred yields are lower. Prices are higher. And yet the prime rate, VRMs, lines of credit and business loans are more expensive. Meanwhile long-term fixed mortgage rates are lower. Huh?

Well, you should know that variable-rate mortgages are linked to the prime rate at the banks, which is in turn affected by the Bank of Canada’s trendsetting rate. All that stuff has increased lately, and likely will again on September 8th. However, long-term fixed mortgage rates are dictated by the bond market, where this stampede by worried investors has yields falling. Also, the US central bank announced this week it will join the crowd by spending billions more to buy up its own bonds (a way to stave off a rerun of the 1930s).

Now, here’s a good question from a blog dog: “How dependent are your bearish housing views on the level of rates? If rates did in fact stay low or even head lower for a long period of time would your views be tempered? Given the market’s recent performance, lower rates is a non zero probability. Have things changed for you, Garth?”

Well, change is the constant. News the US economy will take years longer to recover is significant. The rest of 2010 could see tons more equity volatility, Republicans kicking Obama’s butt on November 2nd, new lows for the housing market and angry people with placards. The suddenly slagging economy will likely put the brakes on many more rate hikes by the BoC and more bond yield drops could take the five-year mortgage rate even lower.

Talk of a double double will be everywhere and the Dutch guy’s shorts will swell as worried Canadians (who never heard of bonds, preferreds, REITs or ETFs) stuff their cash into its manly orangeness.

But will this near-return to cheap money save real estate?

Not a chance.

In fact, the uncertainty, worry and déjà vu of the months to come will simply exacerbate a process now unstoppable. It wouldn’t matter if mortgage rates declined back to 1.5% – buyers would still evaporate because market sentiment has turned. Whereas five months ago bidding wars aroused the animal spirits, as hungry young couples hunted listings at any cost, today houses languish at lower prices.

Hopefully the draining of excess hormones has shown more people the world for what it is. Too much debt. Not enough jobs. Stagnating incomes. More taxes. Crappy markets. Dodgy household finances. Two paycheques from mom’s basement.

A day or two ago I reminded you how things felt in the winter of 09. Soon you’ll feel that way again. Especially if you just bought a house or need to sell one.

Remember my rules. God knows I’ve repeated them enough over the last few months. Trash debt by all available means. Be liquid (real estate ain’t). Chase yield and income. Ignore the big orange guy. Avoid tax (don’t evade it). Get some balance. Prepare to pounce.

The markets are telling you something. Listen.

It’s how opportunity sounds.