WE ENTER 2018 in good spirits. In 2017 the global economy strengthened and 2018 looks to be following on.

The latest short-term economic forecasts for the eurozone suggest that the first half of the year will see growth above an annualised four per cent pace. At the same time, inflation across the G7 countries has ended the year 0.5 per cent higher than it was in June last year.

The US Federal Reserve raised rates three times last year and could do so again this year, while the European Central Bank and the Bank of Japan have started to slow their quantitative easing (QE) asset purchase programmes. Add in the prospect of higher debt issuance in the US from tax reform and you could be forgiven for expecting bond markets to be in trouble.

In fact, US long-dated bond yields are as low as they were a year ago. Bond investment guru Bill Gross is in the press suggesting – not for the first time – that this is the start of the bond bear market. I wonder?

While inflation across the G7 has risen, it is no higher than it was a year ago and prices rises in the US – the epicentre of global tightening – are contained. Inflation growth has stalled in most of the inflation components. At the same time, the Fed spent 2017 revising down its projected US policy rate – its assessment suggested a neutral rate of 2.8 per cent (0.8 per cent in real terms).

US 30-year yields are currently 2.9 per cent - just above equilibrium. Eighteen months ago, long US bonds yielded less than equities, now they yield 50 per cent more. Bonds are better value than they were.

On QE, official bond purchases have slowed, but from lofty levels. The major central banks are still buying around $65 billion of bonds each month. If faster levels of growth are sustained and feed through into higher tax revenues, as they should, then issuance should eventually slip.

Further, most governments remain highly indebted and their bonds are comparatively short-dated. These governments cannot afford to refinance at materially higher interest rates and so debt levels will act as a natural check on servicing costs.

Some market commentators are drawing parallels between the global economy and market of recent quarters and the period from 2004 to 2006. Back then, growth was healthy, inflation was well behaved and central bank policies were benign. While history only ever rhymes, the comparison is easily understood. It is perhaps early to revisit the events of 2008, but it is worth noting that while bond yields rose into the end of 2006, the increases proved modest. An early sign of building deflationary pressures.

A key component of a balanced portfolio is investing in assets that are able to protect the whole portfolio should growth assets come under pressure. Generally, such investments command elevated prices and investors must agonise over whether the insurance is worth the premium.

Occasionally, you can buy defensive assets capable of rising sharply should equity markets slump – long bonds soared in late 2008 - at reasonable cost. These assets can be added to a portfolio in the hope that the ‘insurance’ is never needed and with the comfort that, if not, they shouldn’t come to too much harm. If long-dated US debt is currently fairly priced then, while these bonds may have challengeable value in isolation, they have considerable utility more broadly.

While the argument against bonds appears persuasive, there are two questions to consider: how do things get better for risk assets and are we too quick to dismiss a market that has withstood the buoyant conditions of recent years? These growth conditions can persist but deterioration will come and what will you want to own then?

A decade or so ago similarly heady conditions were unable to cause too much damage to long duration bonds. The same looks to be the case now. You won’t make a fortune from owning US long bonds but you might just want to hold onto one.

Stephen Jones is chief investment officer at Kames Capital.