Once upon a time, lending money to the Government for 20 to 30 years was a mug's game. Now long gilts are the nearest thing to collectors' items, with prices to match.
At the height of inflation in the late 1970s, yields on Government bonds reached a record high of 17 per cent. At one point, memorably, the yield on the longest bonds exceeded their price - for bonds guaranteed by the State, the "safest" kind of bond you can buy.
So difficult was it for lenders of lesser quality to raise money through bonds that the sterling corporate market disappeared. After more than 15 years of disinflationary pressure, inflation is officially close to death.
Out of the 15 leading western economies monitored by The Economist, not one is suffering from consumer price inflation of more than 2.8 per cent per annum. The average rate of inflation in those countries stands at around 1.5. With that has come the renaissance of bonds.
In the short term this has not been a good year for them. Prices have come some way off the peaks. Yet yields are still remarkably low. The 10-year Government bond yield in the United States last week was 4.9 per cent, in Britain, Germany, France and Italy 4.9 to 5.2 per cent, in Japan 1.8 per cent. But the corporate bond market is booming. In Britain, we have been suffering an inverted yield curve, where long- term bond yields are lower than short-term ones. Government bonds with three years' maturity still yield under 6 per cent, against 5.7 per cent for a one-year one. Beyond that, yields get progressively smaller the longer you look out. On a 10-year government bond it is 5 per cent; a 20-year bond 4.4; and 30-year bonds are 4.2 per cent.
Inverted yield curves are mostly associated with the onset of recessions. But with the UK economy in rude health, this does not appear to be happening with gilts. The remarkably low yield on long-term gilts appears due to a chronic mismatch of supply and demand orchestrated, in part, by the Government.
When the Government could be borrowing money at a rate for which predecessors would have given their eye teeth, Gordon Brown is running a comfortable budget surplus and repaying new debt. On the demand side, technical factors create an unusual amount of demand for gilts at the longer end of the maturity spectrum.
Two big questions hang over the market. One is whether the setbacks of the current year, which have seen yields rise and prices fall in nearly all the world's bond markets, are a temporary and necessary phase of readjustment. They could also be an early warning sign that inflationary pressures are re-emerging. If bond yields fall, bond investors will be happy again.
The second is whether the supply/demand imbalance in the gilts market will redress itself, and, if so, over what period. The yields on many bond funds seem tempting, and their track records look good, but beneath the bonnet they are less attractive. By and large, the higher the yield on a bond fund, the greater its risk. The only way many bond funds can meet their advertised yields is to go for riskier types of bonds (eg junk issues) or to pay income at the loss of capital. Many bond funds trade at below par value, meaning part of the income is capital. That will not be a disaster if bond prices rise again, as is probable, but it would be less worrying if there was evidence that bond fund investors knew what they were buying.
That is hard to find. Part of the trouble with bond funds is high charges. The research firm Fitzrovia International says the average UK bond fund costs investors 1.2 per cent a year (0.9 for CAT standard funds), with a bid/offer spread of 3.4 per cent. Expense ratios of most US funds are half that, without initial charges.
Trying to pay investors 8 per cent, when government bonds worldwide are yielding 5, with costs more than 1 per cent per annum, does not and cannot add up. Something has to give - credit quality or capital. Unless, of course, investors are confident interest rates have further to fall.