A glance back at the chart of the most indebted nations in the euro zone offers little comfort for those investors exposed to the debts of Spain, Portugal, Italy, Belgium and France. Dylan Grice, strategist at Société Générale recently quipped, "There is no such thing as toxic assets, only toxic prices". There is a price at which these assets become attractive. However, with French 5 year paper offering a nominal yield of 2.10%, that price is still not right. With French national debt approaching €1,300bn, only a euro zone politician could describe this return as risk-free.

Volatility in the bond market over the next few years is going to create massive gains and losses for speculative investors. For those charged with preserving their clients' wealth, things will be volatile enough, even without direct exposure to these toxic credits. The most sensible approach will surely be to diversify across multiple asset classes and currencies, in each case attempting to identify investments that offer value on a fundamental (that is, risk-adjusted) basis. The principle of avoiding capital loss, both incidental and catastrophic, must surely be paramount.

David Fuller's view Sensible comments and what about that "Volatility in the bond market over the next few years"?

Tim Price has sensibly invested in bond funds holding "bonds issued by those countries that the managers consider are best placed to pay that money back…" (See the penultimate paragraph of his letter posted on 29th November.)


However, plenty of so-called Baby Boomers have invested in western bonds, judging from fund statistics over the last two years, because they choose to believe that more deflation, double-dip recession or perhaps even depression lie ahead. They also hope that Mr Bernanke's QE will keep yields from rising and creating capital losses.

I fear that this will end badly for many fixed interest investors. US 10-Year yields have surged in the last two months. Some heavy selling has obviously occurred and this trend has been reflected by yields in other countries. Technically, we have a short-term oversold condition. I am hoping this leads to another small reaction so that I can reopen shorts in long-dated futures. However it may not as historic lows for the bond yields of many countries fits my definition of a bubble. If sentiment really has turned, yields could surprise everyone by surging higher, not unlike the stock market rally following lows in 2Q 2009.