"There was once a time when government bonds were viewed as safe investments. Safe as houses, you might say, if you weren't keeping up with events. But that was then, and this is now. Something rather ominous has started to happen in the government bond markets of the west. Under normal market conditions (remember them?) corporate bond yields trade above the yields on government debt. This is logical insofar as corporate bonds carry higher risk than governments, which can print money and levy taxes to make good any shortfall in their requirements for income. But higher quality companies are now in the unusual position of seeing their debt offering lower yields than those on government bonds with the same maturity. Bloomberg points out that bonds issued by Berkshire Hathaway, Procter & Gamble, Johnson & Johnson and Lowe's have all recently traded with yields lower than those of equivalent duration US Treasuries. If you want to see a mismatch between theory and reality, look no further than the bond market convention that the return from US Treasuries represents the so-called "risk free rate". There can only be two conclusions, and they are mutually exclusive. Either the bond market is wrong, and the corporate bonds of these companies are mispriced (and by extension the price of US Treasuries is comparably mispriced but in the opposite direction). Or the bond market is right, and the perceived "riskiness" of US Treasuries (and certainly UK Gilts) has risen sharply. As Gillian Tett for the FT points out, 10 year US Treasury yields at the end of March also started trading above 10 year swaps (which represents interbank risk). Both the US and the UK enjoy 'AAA' credit ratings from the major ratings agencies. This would be some comfort were it not for the fact that the financial crisis has revealed the ratings agencies to be a bunch of clueless and conflicted monkeys.

Wise financial counsel suggests that if you're at the poker table and haven't spotted the patsy yet, it's probably you. On a similar basis, if a given investment looks terrible, sounds terrible, smells terrible, has terrible fundamentals, and is rushing through the markets screaming "I'm terrible," then discretion might have to be the better part of valour in the interests of preserving both capital and sanity. This argument is even more clearly articulated when the one buyer of last resort - namely the central bank of the country (or countries) in question - stops buying government bonds, as the Bank of England has already done, albeit with the caveat that it might be back at the poker table if required, hurling more of the nation's capital into the toilet. Meanwhile, having troughed at 3% during the financial panic of 2008, 10 year Gilt yields now yield 4%. It is not beyond the realms of plausibility that they rise further. This would equate to holders of conventional Gilts losing money. Relative to (increasingly risky) western market government bonds, why not consider high quality dividend-paying stocks which in some cases offer higher yields and the prospect of growth in real terms over the medium term, which in the case of government bonds looks practically impossible?

David Fuller's view I assume that the USA and UK governments will do all that they can to delay the point at which long-dated Treasury and Gilts yields rise quickly and significantly. They can do a lot, via quantitative easing, as we have already seen, but I assume that this is not and cannot be a permanent strategy. Meanwhile, short trades in Treasury or Gilt futures remain expensive because the interest rate cost adds up and QE can achieve bear squeezes.

US 10-year Treasuries (5-year weekly & 10-year weekly) remain firm beneath the psychological 4% level and I will regard a sustained move over this hurdle as the equivalent of an amber warning light for equity investors that the monetary environment is changing, although it might possibly be a short-term tailwind depending on other factors which also influence sentiment. However I will regard a 10-year Treasury yield above 5% as a red caution light and increasing headwind for equities with every additional uptick in the government's cost of borrowing. The UK outlook is similar (5-year weekly & 10-year weekly).