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Bonds Reclaim Limelight After Stock Rout

NEW YORK (TheStreet) -- Quick: How could you have easily beat the bull market in stocks from 1980 to 2008, when the Dow soared from 800 to nearly 14000?

Answer: by owning bonds.

"Starting at any time from 1980 up to 2008, an investor in 20-year Treasuries, rolling them over every year, beat the S&P 500 through January 2009," says financial forecaster John Mauldin.

Despite the famous bull market in stocks that began in the early 1980s with the Dow trading around 800, the bond market outperformed stocks as interest rates fell. In the early 1980s, amid fears of massive inflation, yields on 20-year Treasuries were 15%. They've recently fallen to below 4%, generating tremendous profits along the way.

Over the long run, history says that a portfolio of stocks will outperform a portfolio of bonds. But there have been some periods when bonds have beat stocks. In fact, we're nearing the tail end of one of those periods.

People rarely praise the performance of bonds during the past 20 years, and no cocktail party discussion ever involved a hot tip on bonds, but suddenly bonds are moving to center stage.

That's because everyone from your mother to your portfolio manager is suddenly searching for yield. With 10-year Treasuries now at 3.5%, and your mom's CDs earning less than 1%, there's a mad rush for income. Sadly, there's very little discussion of price risk, which will only become apparent in hindsight if inflation returns.

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