There has been a lot of hot air wasted in discussions about bond bubbles over the last few years, as yields have collapsed and prices have soared in the extraordinary world of zero interest rates and quantitative easing that we now live in.

TOM BECKET

There has been a lot of hot air wasted in discussions about bond bubbles over the last few years, as yields have collapsed and prices have soared in the extraordinary world of zero interest rates and quantitative easing that we now live in.  

But these are certainly worrying times for bond investors.

On 'bubbles' our view is simple: despite the fact that countries like Germany and companies like Nestle have been able to borrow for free (or even at times been paid to do so) it does not mean there is a bubble in bonds.

Nor does the fact that Mexico, a country of dubious borrowing in the not-so-distant past, has been able to issue 100-year bonds at yields of close to 4per cent, mean that bonds are bubblicious. We just think they are bad value.

With bonds, unlike equities, property or commodities, you should always know what you are going to get in the form of a nominal return, as long as default is avoided (those Nostradami who can predict Mexico's next century are certainly smart).

So let's stick to the bad value theme we have held for well over a year and evaluate recent moves in bond markets and what we have learnt from the mini- shocks of February and May. To make clear, we do not think the re-pricing in yields is over, although in the short term market interest rates might have moved far enough.

In the medium term, we expect the upward pressure on yields to continue, and the last few weeks have been really challenging for assets connected to government bond yields. Our view that yields were to rise, and avoiding bond duration was key to investment success, has started to work well.

There are multiple reasons why yields have started to rise. Firstly and simply, yields were too low. As an example the benchmark 10-year German bund yield hit a low a few weeks ago of 0.05per cent. Obviously yields were not going to stay at those levels and if you bought at that yield you have seen 14 years of income wiped out in the last few weeks, as yields have risen to just above 0.7per cent.

The second reason why we think yields have risen is the change in inflation expectations, in part driven by the 20-25per cent rise in the oil price in recent weeks. In our view, most commodities appear to have troughed and inflation expectations have been steadily rising in the last few months. This is not good news for bonds.

Thirdly, global economic data has been sound. Note that sound does not mean 'stunning', but rather 'solid', but that level of growth is sufficient to stave off the worst economic fears and allow the Federal Reserve probably to raise rates later this year. Bond markets have followed Dr Yellen's guidance and started to price future rate expectations higher. In Europe, we think that if the Germans had had the current economic data in front of them in January, rather than Draghi's deflation fallacy, then there is no way they would have given their tacit approval to QE.

In terms of what we have learned from the bond markets' recent moves, we would start by once again cautioning how illiquid bond markets have become.

The other major lesson that investors should heed is quite how much money was, and probably still is, positioned in the consensus 'lower for longer' theme that did so well late last year.

The reversal that we have seen in the fortunes of investments that are positively linked to a gloomy economic outcome could well be just the start of an overdue correction in price, and the start of a very challenging environment for 'cautious' investors, in particular.

Tom Becket is Chief Investment Officer at PSigma Investment Management