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Received opinion is that Gilts are now a bubble caused by pension fund buying. This argument is as mistaken as the conjecture a couple of years ago, declaring that Gilts were finished. Contrary View no. 44 "The ultimate contrarian signal", was our correct reply to that.
The characteristics of a bubble are that there is no dissention: everyone says you just have to be in there. In order for the current Gilt market to be diagnosed as a bubble, those same voices need to be saying in unison that "there is no alternative". We dealt with the bubble argument in July 2003, "The bond bubble is years ahead". Subsequent events have demonstrated how right our view has been.
Our consistent view is that nominal Gilt yields must fall to around 1% with equities slumping, before the long term trends can reverse. Pension fund buying is just a step in the long term conversion flow from belief in equities to belief in Gilts and is still in its early stages. See Contrary View no. 22 conversion flow into Gilts - the belief that Gilts are the place to be.
Gilts are now displacing equities as a vehicle for capital gain. This ultimately will bring nominal Gilt yields to around 1% before the long term trends change again. Real yields will still be positive, because the inflation rate will be negative. Yes, that's right, falling retail prices lie ahead: something else the consensus find difficult to see coming.
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