One by one, the giant investment funds are quietly switching out of government bonds, the most overpriced assets on the planet.

Nobody wants to be caught flat-footed if the latest surge in the global money supply finally catches fire and ignites reflation, closing the chapter on our strange Lost Decade of secular stagnation.

The Norwegian Pension Fund, the world's top sovereign wealth fund, is rotating a chunk of its $860bn of assets into property in London, Paris, Berlin, Milan, New York, San Francisco and now Tokyo and East Asia. "Every real estate investment deal we do is funded by sales of government bonds," says Yngve Slyngstad, the chief executive.

It already owns part of the Quadrant 3 building on Regent Street, and bought the Pollen Estate - along with Saville Row - from the Church Commissioners last year. But this is just a nibble. The fund is eyeing a 15pc weighting in property, an inflation-hedge if ever there was one.

The Swiss bank UBS - an even bigger player with $2 trillion under management - has issued its own gentle warning on bonds as the US Federal Reserve prepares to kick off the first global tightening cycle since 2004. UBS expects five rate rises by the end of next year, 60 points more than futures contracts, and enough to rattle debt markets still priced for an Ice Age.

David Fuller's view

Here is a PDF of AE-P's column.

Subscribers know the Fuller Treacy Money view on bonds.  Briefly, yields are trading at bubble low valuations and the next big move will be upwards.      

I maintain that we will see a Fed quarter-point rate hike in December and at least another similar increase in 1H 2016.  However, “five rate rises by the end of next year” as UBS expects?  I doubt we would see that during an election year, especially as it could push up the Dollar sufficiently to weaken the US economy.

The political problem for the Fed is that a rate hike every quarter in 2016 would kite The Dollar Index because the US economy is clearly ahead of the curve in terms of economic recovery.  According to a rule of thumb estimate, a rapid 10% rise in the US currency knocks a full point off US GDP growth.  Democrats in the US Congress would be complaining that the Fed was weakening the economy and damaging their election prospects. 

Lastly, there is a “double top” comment referring to the US stock market in the latter portion of AE-P’s column above.  While theoretically possible, particularly if the Fed continued to raise interest rates against a background of an increasingly strong US Dollar which tipped the US economy into a recession, I credit the Fed with more sense. 

Janet Yellen has previously said that US rates will rise very gradually.  Yes, she could change her mind if developed economies plus China all clearly recovered in 2016 and commodity prices simultaneously surged.  

This will occur at some point but it will probably take more time.  However, if I am underestimating the timing of a simultaneous economic recovery, watch resources indices such as the CRB Continuous Commodity Index, which would provide clear evidence of inflationary pressures.  

Meanwhile, US stock market indices such as the DJIA (weekly & daily), S&P 500 (weekly & daily) and Nasdaq 100 (weekly & daily) have all seen the long overdue “ten percent plus” correction, which I had previously forecast we would see before the end of this October.  The actual lows occurred in late August and the subsequent recoveries have been impressive.  Seasonal factors are positive, including the US presidential election year.

Lastly, for early warning of a double top, we would have to see at least sustained breaks beneath the mid-November reaction lows for the three US stock market indices shown above.