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Bond investors have a lot on their minds right now. Yields are razor-thin and a number of central bankers are now talking up the possibility of rate hikes in the not-too-distant future, threatening bond prices.

Rather than taking a risk with bonds, why not just bide some time in cash?

That sounds like a decent plan until you take a quick look at how well bonds have performed this year. Yields are down dramatically, just about everywhere you look, driving prices higher and delivering unexpected returns to anyone who thumbed their noses at the apparent risks.

The yield on the 10-year Treasury bond began the year yielding 3 per cent and just about everyone expected the yield to continue to climb throughout 2014 as the U.S. economic recovery rolled along. Lo and behold, the yield has fallen below 2.5 per cent.

The moves don't stop there. In Canada, the 10-year government bond started the year at 2.7 per cent and has since slipped to 2.2 per cent. In Germany, the 10-year bond started at 1.92 per cent and is now below 1.15 per cent. And in Spain, one of the sources of Europe's sovereign debt crisis not long ago, the 10-year government bond has fallen from 4.1 per cent to just 2.6 per cent.

As yields fall, bond prices rise – and as bond prices rise, bond investors make money. Is there more money to be made?

David Wolf, a portfolio manager at Fidelity Investments Canada and a member of the investment firm's Global Asset Allocation Group, thinks there is.

Mr. Wolf, who spent several years working at the Bank of Canada, argues that these are unusual times. For one thing, central banks have taken their key interest rates in recent years to remarkable lows – close to zero per cent, in the case of the U.S. Federal Reserve.

"The fact is, in the era of independent monetary authorities, no central bank in a developed market has ever put rates to zero and then had them return to a level that would previously have been considered 'normal,'" Mr. Wolf said in a note.

Interest rates will still fluctuate with the business cycle, but the ups and downs will be far more tame than anything seen over the past four decades.

Stephen Poloz agrees. In a CBC interview this week, the Bank of Canada governor said that the new normal for rates "is probably going to be lower than what we thought in the past."

But Mr. Wolf goes further, arguing that a few so-called structural forces will also hold rates down.

For one, the North American population is aging, which means that the labour force will expand more slowly, diminishing the economy's capacity.

Similarly, the swelling number of retirees translates into more conservative investment portfolios and more demand for bonds, putting downward pressure on yields.

Mr. Wolf also argues that low interest rates tend to be self-reinforcing: They feed our massive appetite for debt, which then makes us (and the economy) less able to withstand rising rates.

"This is the essential story of Japan over the past two decades," he said, "and there are troubling signs that similar dynamics may be emerging closer to home."

Lastly, he believes that inflation – capable of slaying any bond market – isn't a big threat, given that central banks have been far more successful at holding it down than driving it higher.

"This important asymmetry would suggest a balance of risks tilted towards a lower, bond-friendlier path of inflation over time," Mr. Wolf said.

As a defensive play, then, he prefers bonds over cash. And U.S. bonds, in particular, could provide Canadian investors with a nice currency boost, should the loonie slide from its lofty perch.

For sure, bonds yielding slightly more than 2 per cent aren't going to make you rich. But if you consider them a contrarian bet against a roaring economy and troubling inflation, they look almost cool.

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