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There is an old joke about two friends walking in a forest. At one point, they notice that a large black bear is following them at some distance. They walk faster, but the bear keeps getting closer. At one point, one of the two friends stops, takes off the chunky boots he’s wearing, and replaces them with light running shoes. The other friend comments that even with running shoes on, he couldn’t outrun the bear and the friend replies, “Yes, that may be true. But I’ll be able to outrun you!
The creation of the secondary market (“US bond reaction to inflation data leaves investors perplexed”, Report, FT Weekend, July 17) created a similar situation, especially if many bonds are held, or at least controlled, by financial agents who consider themselves better informed and more agile than others. They may have convinced themselves that when the time came, they would be able to exit their investments faster than others, offloading the bonds onto less nimble investors.
In addition, the extraordinary rise in stock prices over the past two years must have created at least some possibility that at some future date a major adjustment in stock prices could occur. This would make bonds relatively more attractive than stocks.
Former Director, Fiscal Affairs Department, IMF
Bethesda, Maryland, United States