The big story in the markets last year was not about stocks.
Americans sold off their stock mutual funds, the most popular way to invest in US companies, at the fastest clip since 2008, the year the financial crisis began. That occurred despite the fact the stock market rose steadily; the benchmark Standard & Poor’s 500 index ended the year up 13.4 percent.
Investors have been opting instead for the assumed safety of bonds. Money has been steadily flowing into mutual funds holding bonds of all sorts for the past four years, but the pace accelerated in 2012. The percentage of household investments in bonds shot up to 26 percent from 14 percent just five years ago, according to Morningstar.
Entering the new year, a growing number of professional investors are betting the craze for bonds has gone too far, perhaps dangerously so, as is evident in the headlines on year-end reports from large investment firms.
“Bond PAIN in 2013?’’ Wells Capital Management’s chief strategist asked. ‘‘Caution: Turn Ahead,’’ BlackRock analysts wrote. ‘‘The inflection year,’’ said Bank of America.
This is not the first time analysts have forecast an end to the decades-long rally in bond values. But previously, many of the voices predicting it were pessimists who believed investors would sell off their bonds when they lost faith in the government’s ability to pay back its bonds, forcing the government and many other bond issuers to pay higher interest rates. When interest rates rise, older bonds with lower interest rates are worth less.
While those previous forecasts have proved expensively wrong, this year the forecasters are being joined by many economic optimists who argue that a strengthening US economy is likely to make investors willing to embrace the risks involved in stocks. The only question, they say, is how quickly it will happen.
When the turn does come, it is likely to cause pain for at least some bond investors.
‘‘You don’t want to be the last one out the door when the trends turn,’’ said Rebecca H. Patterson, chief investment strategist at Bessemer Trust. ‘‘All good things come to an end and we want to make sure we’re in front of it.’’
Most of the talk of investors shifting money from bonds into stocks relies on the assumption that politicians will resolve the fiscal impasse and the coming debate over the nation’s debt ceiling. If political discord continues, it could put off any shift into stocks.
But a number of surveys suggest that professional investors are starting to prepare for a change. Hedge funds polled by Bank of America said they had more of their portfolio allocated to stocks than at any time since 2006.
The Federal Reserve has been engaged in an aggressive effort to buy bonds and drive down interest rates. The long term goal of that program is to encourage banks to lend money and to drive investors out of bonds. But in the meantime, falling interest rates have made bonds more attractive.
The Fed has said it wants to keep rates low until 2015, though it could let them rise sooner if the economy picks up faster than expected. The 10-year Treasury hovered near 4 percent in recent years but has stayed below 2 percent for much of 2012.
A number of big-name investors say they believe the low rates and economic uncertainty are likely to endure, giving bonds a continuing attraction. William H. Gross, cofounder of Pimco and perhaps the world’s most famous bond investor, said on Twitter that he expected interest rates to fall further in 2013.
Most of the predictions that interest rates will stabilize or turn around are based on the belief that an improving economy will help push unemployment lower, restore confidence in US companies, and encourage inflation to start to rise. If inflation does go up, it will make current bond holdings less attractive.
There is growing evidence this is already happening. In addition to the rising stock market, housing prices have begun to move up and unemployment has been trending down.