A liquidity trap is when monetary policy becomes ineffective due to very low interest rates combined with consumers choosing to save rather than invest in higher yielding bonds or other investments.
While the liquidity trap is a function of economic conditions, it is also psychological as consumers opt to save cash instead of opting for higher paying investments due to a negative economic outlook.
The liquidity trap is not limited to bonds. It also affects other areas of the economy as consumers spend less on groceries, meaning businesses are less likely to hire employees.
Some ways to get out of the liquidity trap include raising interest rates in the hope that the situation will resolve itself when prices fall to attractive levels, or increasing government spending.