Montreal, Canada

Since the emergence of the credit crisis almost three years ago (August 2007), I've been glued to global credit barometers. Bonds provide far greater clues to the future direction of the primary market trend than common stocks and basically dictate the direction of the latter, as we soberly discovered starting in late 2007 and throughout a dreadful 2008.

Admittedly, like many investors who predicted lower bond prices this year amid an avalanche of Treasury supply and rising long-term interest rates due to a strengthening economy, I was caught wrong-footed. Instead, bonds have rallied sharply – beating stocks for the first time since 2008. Unlike previous economic recoveries following a financial crisis, this one has thus far been lethargic and unimpressive. The market has had enough of waiting and pulled the plug on equities again on Tuesday.

My U.S. managed accounts continue to hold a big position in high quality bonds – mostly intermediate and long-term U.S. Treasury's and strip or zero-coupon bonds. We also hold a big stake in PIMCO Total Return Fund managed by Bill Gross. Bonds are currently 36% of client portfolios and stocks just 10%.

Though I'm not bullish on bonds longer term, there's no doubting that U.S. Treasury securities remain a safe-haven in an increasingly bearish environment for risky assets. Until they're finally discredited at some point in the future, Treasuries are probably better and safer hedging instruments than most hedge funds. They're available to the public, unlike hedge funds, almost always make money when markets crack, unlike hedge funds, and offer low fees and high liquidity – again, unlike hedge funds. That's why for my U.S. investors I prefer high quality bonds and refuse to purchase hedge funds; the majority of hedge funds are basically great businesses for their sponsors but poor investments for their investors. Plus, most retail investors can't buy them anyway because they're only available to accredited investors. And if you do, good luck trying to get out quickly; redemption terms are horrid.

Treasury's provide a great hedge against equities and other risky investments when markets tank. That negative correlation proved correct again on Tuesday as Treasury yields plunged to their lowest levels in 14 months. I'm not sure what the average hedge fund did yesterday but I'll guess they lost money. Most hedge funds don't even hedge yet alone command a skill to navigate through turbulent financial markets. The sector declined 19% in 2008 – not exactly shrewd hedging.

The trend now is renewed deflation fears as a host of economic data since late May portend to a softening economy; it's fair to assume at this point that the United States is slowing and the markets are discounting a moderation of growth over the next several months. Bond yields at 2.97% don't imply an inflation problem or accelerating economic growth. TIPS, or Treasury Inflation Protected Securities, now yield 1.88% after adjusting for the nominal yield on ten-year Treasury bonds. That's the lowest yield in more than a year and indicative of accelerating disinflation or worse, deflation.

Listen to what bonds are telling investors. I'm not sure stocks are dead money yet since another rally might be in the cards before 2010 is over. I would use future rallies to get out of Dodge. The bond market is flashing a big warning sign and investors would be wise to heed its advice. Wait for a correction in bonds or higher yields before buying or adding to your fixed-income holdings; bonds are overbought at these levels and will pull back as equities muster another rally.

Tomorrow is Canada Day and financial markets here are closed. I'll be back on Friday.