Stock market rallyWall Street greeted positive economic data from around the world with a sharp stock market rally to start September. And for most equity investors, the positive development provided a rare ray of sunshine following the most brutal August trading in nearly a decade.

But while stocks welcomed a respite from what some see as a bubble in pessimism, the turn of events should be just as unnerving to a fast-growing crowd of individual investors: those who have recently marshaled their savings into ultrasafe holdings like U.S. government bonds. Such folks saw their new investments take a sharp dive on Wednesday.

The jolt should serve as a reminder of how quickly things can change given the dear prices safe assets are commanding, and it could be a sign of things to come.

Out of Equities, Into Bonds

There has been no shortage of retail investors running for the cover of bonds lately. Debt holdings, including domestic and foreign government bonds as well as corporate bonds, now make up 10% of family financial assets, the highest level since 1970, according to recent data from the Federal Reserve and Credit Agricole. Investors pulled out $7.1 billion from global equity funds but parked $5.2 billion into already-swelling bond funds during the week of Aug. 25 alone.

Benchmarks like 10-year Treasury tumbled on Wednesday as yields spiked to nearly 2.6% following better-than-expected manufacturing surveys in the U.S. and China. The sharp move demonstrates how highly pessimistic is the baseline scenario that an increasing number of investors have begun to gravitate to. Some commentators suggest that bonds could crumble in the face of more positive economic surprises like continued stronger-than-expected manufacturing data in the coming months.

Investors should note, though, that it would take far less than months of solid economic gains to cause government bond prices to collapse, considering the deeply negative economic sentiment currently being priced in. The paltry yields, after all, are a throwback to the days of the credit crisis when the economic outlook was far more dire than it is now.

And bouts of other good news -- like better-than-anticipated data on the jobs front, due out this Friday -- could send Treasurys reeling as newly emboldened investors depart for assets with higher incomes. Indeed, the meager yields on Treasurys has led some pundits to claim that a bond bubble approaching the level of the dot-com boom a decade ago may be in the works.

Bond bulls tend to counter that the comparison is absurd since investors can usually get their money back -- if they hold U.S. Treasury debt until maturity. For investors who paid top dollar to buy into shares of dot-coms that soon vanished, the contrast will be vivid.

What If Inflation Returns?

However, even if the comparison to dot-coms proves hyperbolic, investors may be making poor decisions by shunning risk in the wake of mounting gloom recently. Simply holding on to long-dated, low-yielding debt like 10- or 30-year bonds is hardly an appealing prospect. And that's especially true if inflationary prospects return along with growth.

Of course, a deflationary scenario where stable assets with some income (no matter how meager) perform well has quickly become gospel following a slowdown in the U.S. economic recovery over the last few months. But investors should think back to the spring, when major publications like Newsweek were cheering the sharp U.S. rebound and the bond market was bracing for big inflationary pressures to recall how quickly things can change.

Wednesday's rally should serve as yet another gentle reminder.

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The retail and financial markets will improve as money is freed up by virtue of the fact that confidence is increasing because there is growing confidence that Borat O'Bama will be a ONE Term President.

September 02 2010 at 11:37 AM Report abuse +1 rate up rate down Reply

It is no secret about the identity of the wealthiest and most powerful man in the world, he is Sir Evelyn De Rothschild. Even the sheiks of Arabia bow in his presence hoping not to anger him, with the touch of a pen he can drives them into bankruptcy. His disclosed wealth is over 2 trillion with another 5 trillion invested in gold and diamonds safely hidden in the underground vaults of the Vatican. The International Bankers Exchange claim he is wealthy enough to purchase the continent of Europe and make it his private domain. He is now 79 years old, there is speculation that upon his death most of his wealth will be left to a 21 year old beauty queen that has captured his heart.

September 02 2010 at 11:27 AM Report abuse rate up rate down Reply

Hm , it is dire people , the shoring broads are about to break from all the pressure , shoring only holds with lots of bracing , there are no more braces and the ones in place are collapsing fast .

September 02 2010 at 11:13 AM Report abuse rate up rate down Reply

I am basically in the fixed income market and believe I know a few things about bonds. I am presently selling off all my bonds that have a maturity over 10 years.In the last month have sold over $150,000 in long term bonds and made a significant profit on every one .However the basic issue is what do you do with this cash. I have been buying short term bonds ,five years or less,with yields of about 4% for 5 years. This is not good however a lot better than maoney markets yielding about .05% which is assinine.What the wall street people and government never seem to mention is that savers are getting royally screwed by the government and wall street to benefit the banks. Just think there is about $3.5 trillion,not billions sitting in money markets,cds,savings accounts etc earning less than 1 percent which means the cost of funds to the banks are at a record low,which is why they are making record profits.The spread between what they lend at and what their cost of funds is at an all time record level.This provides the banking industry with approximately $140.0 billion in profits at the expense of savers.

September 02 2010 at 10:06 AM Report abuse +1 rate up rate down Reply

Bonds are subject to "Jubilee" default. Every 50 years, anyone who has a debt, is forgiven. If the term of the bond, crosses a Jubilee year, then you should realize that you are giving, rather than investing for a return. There is nothing wrong with giving, though. Just be sure that's what you really are intending to do. Charity bonds are a good way to realize very long-term returns, in heaven. May God bless your heart, for buying bonds.

September 02 2010 at 10:02 AM Report abuse +1 rate up rate down Reply
John Kiegiel

This is only a blip on the screen. No sector in the market actually shows any improvement that will raise optimism about the market. Market is currently at 10 year ago high and will stay here until employment picture gets better. claims may slow and some people falling off the big list, but falling on the emergency funding, which almost always is not talked about unless the market falls another 10%. Executives cashing out of company stock is an indicator that bad times are ahead. Finanical advisors whom are trying to keep there jobs along with maintaining fees for the brokerage houses whether they perform or not. Bonds are low cost instruments.

September 02 2010 at 10:01 AM Report abuse +1 rate up rate down Reply

I hate to tell you this, but, bonds are no-where-ville.

September 02 2010 at 9:13 AM Report abuse +1 rate up rate down Reply

Oh no, the sky is falling, said chicken little. Henny Penny says the economy is in shambles and we have run up so much personal and governmental debt that we're drowning in it and will NEVER be able to pay it back. And so many people are out of a job that it's well over 10% and you think that this stock market has a chance. You must be smokin the good sheet, my friend.

September 02 2010 at 8:29 AM Report abuse +1 rate up rate down Reply

Just look at the indicators. Sucker rally for sure....the biggest known fact is that we a government which is an obstruction to doing business. The stock market will only flat line or sure as hell isn't going up under this administration. Everyone that has a little business sense can figure this out.

September 02 2010 at 8:15 AM Report abuse +4 rate up rate down Reply

this guy is probably long the market. he would love to see everyone sell their t bonds and rush in to equities at which time he would sell off and short the market at the top, and write another article along the lines of Hmmmm, those t bonds are looking good hoping everyone will sell off the market and rush back to bonds. you might get a miserable return (by historic standards), but you probably can't lose, we hope. sanfopar right, it is a now a casino.

September 02 2010 at 8:02 AM Report abuse rate up rate down Reply