Last week saw some interesting developments in the increasingly surreal world of the bond markets when German multinational giant Henkel, whose brands include Persil, Locktite glue and Right Guard deodorant, and French healthcare giant Sanofi were able to sell bonds to investors at negative yields.

This means professional investors have just snapped up two offers totalling €1.5 billion that are guaranteed to provide losses if held to maturity. For most of us it is probably hard to get our heads around such a notion.

These enormous blue chip and financially robust companies were able to borrow on such favourable terms because of the way central banks across the globe, but in this case the European Central Bank, have adopted extraordinary policies in recent years as they try to find a magic bullet to stoke economic growth.

These measures include negative interest rates, where commercial banks are charged for holding cash with central banks to try to encourage them to lend instead, and so-called quantitative easing programmes, where they create new money electronically and use it to buy vast amounts of bonds.

The effect of the latter is to inject new cash into the financial system while keeping yields artificially squeezed in the belief that by ensuring borrowing costs are kept incredibly low, this will stimulate economic growth.

The impact of these experiments in expanding the supply of money is staggering, with some 36 per cent of government bonds across the globe recently estimated to have negative yields.

In the case of Henkel and Sanofi bonds, the level of negative yields provided to investors were lower than those on core eurozone government bonds, meaning they were seen as relatively more attractive.

While we haven’t gone quite as far as negative interest rates in the UK, the decision by the Bank of England last month to slash interest rates to an all-time low of 0.25 per cent in addition to buying up to £60bn of UK government bonds and £10bn of UK corporate bonds, has sent the yields on 10-year gilts crashing to a meagre 0.82 per cent.

This is at a time when higher import costs due to a weaker pound and a rise in the oil price are expected to send inflation heading past two per cent over the next year and half.

It’s hard to get excited about an income generating investment where the return on offer is lower than inflation.

All this has led to a topsy-turvy Alice in Wonderland like investment world, where bonds, traditionally considered as low-risk investments that provide a dependable source of return in the form of fixed income, now in many cases carry risk but offer no return.

While the ability of governments, companies and individuals to borrow money at incredibly attractive terms will be welcomed by them, there are losers as well in all this.

Among them are cash savers, including the 10 million members of the public who ploughed almost £60bn into cash ISAs in the last tax year, but who are barely scraping a return from their deposits – but also anyone coming up to retirement that had hoped to use their pension to secure a guaranteed income for life through an annuity. Rates on these have nose-dived, reflecting the evaporation of the bond yields that underpin them.

The actions of central banks, including the Bank of England, mean that finding a decent income in the current environment can feel like the quest for the elusive Holy Grail. This ultimately means income seekers are being coaxed into taking a lot more risk than they have had to in the past, whether through dipping into the racier parts of the bond markets such as high yield bonds or emerging market debt, but also through investing in shares.

This luring of investors into higher risk assets is happening at a time when the outlook for dividends is also uncertain.

This means investors who are being flushed out of cash and bonds into the stock market need to tread with special care, avoiding companies with ‘too good to be true yields’ that could be vulnerable to cuts.

Strong funds that focus on sifting out the wheat from the chaff when it comes to identifying dividend winners include Evenlode Income, Standard Life UK Equity Income Unconstrained and Threadneedle UK Equity Income.

Jason Hollands is managing director of Tilney Bestinvest