Allow me to use the 1998’s Japan as an example to illustrate this phenomenon.
In the late 1990s and early 2000s, Japan experienced a prolonged recession, which accompanied a deflation. With the deflation, the supply of bonds was contracted since a high deflation rate increases the real cost of borrowing money if the bond interest rate is still fixed to the original one. In the meantime, demand for the bonds will grow in the sense investors believe they can make more money by buying bonds instead of other assets whose values are decreasing in nominal. More demand and less supply caused the lift of bond price and a weakened bond interest rate.
Besides deflation, the business contract also contributes to the fall of the bond interest rate. Business cycle contracts caused a lack of investment opportunities. Fewer bonds are issued and less investment was made because of the falling of overall wealth, the demand curve shifted less than the supply curve. Thus, the overall bond interest rate decreasing again.
It was a strong negative signal to Japan indicating a contracting economy.
Some important observation:
Fisher effect when expected inflation rises, the interest rate will rise.