Are bonds and Asian currencies a good buy?

Have you gone mad? Interest rates are rising so bonds are a 'sell', and not a 'buy'. But if that is the case, why are so many investors now putting money into bonds?

Indeed, bond prices have been rallying in recent weeks. There is a school of thought that suggests that the US economic recovery will soon run out of steam, and that interest rates will have to be cut again.

This is what the long-term bond market tells us. Its rates have been falling at the same time that short-term rates have been increasing. So has the Federal Reserve got it wrong? Is Alan Greenspan doing the wrong thing in hiking rates at this point in the cycle?

Lester Thurow made the point in his interview with AME Info this week that US inflation was in fact zero, and that the risk of deflation in the economy was far from dead. Other eminent commentators have noted that the real monetary supply is rapidly decelerating in the US, partly due to a contraction in home loan re-financing.

It could be that the US economy is correcting its own imbalances, and that Mr. Greenspan will have to think again. If an economic slowdown is in progress then he will be forced to cut interest rates to sustain this debt-laden economy.

Now in this scenario buying bonds makes a lot of sense. Such fixed-interest instruments will rise in value if interest rates fall again, and the market already looks to be anticipating this possibility. Moreover, if equity investors decided to head for the exit door, then bonds would benefit even more as an alternative investment class.

Lower interest rates on US dollar holdings would increase the attractiveness of other currencies, and Asian currencies look the most undervalued in dollar terms. Standard Chartered Bank was one of the first to tip Asian currencies as a good place to stash your cash, and has a good record on these recommendations.

You only have to visit places like Thailand as a US dollar earner to feel the strength of the dollar, while this is definitely not the case in the UK or Europe at present.

Thus Asian currencies and bonds may be the best investment safe havens in the current investment climate with the outlook for global stocks and property looking distinctly uncertain.