But the real gains have come from owning longer-dated Treasury paper, as an index of bonds beyond 20 years in maturity is up 9 per cent so far in 2010, after a slide of 21.4 per cent.
The value of long-term bonds is primarily determined by expectations of inflation, which has seen the core consumer price index hit a 44-year low.
A weaker economy in the second half of this year, accompanied by further downward pressure on prices, would be a plus for bonds.
Lombard Street Research notes that broad money in the US has contracted for the past six months – and for 15 months of the past 18 – at a time when the Fed has maintained easy monetary policy. “The message from the US broad money and credit trends over the past two years is clear; there is little likelihood of a return to sustained trend rate, let alone above-trend, growth in the near future,” says Gabriel Stein, director at Lombard.
Against that backdrop, the debate now turns on whether bond yields will break the lower band of their range, accompanied by stocks hitting fresh lows in the coming months.
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