Against all odds, bonds have stood tall recently.

Alan Greenspan's speech Friday may decide whether they keep standing.

Coming into the new year, the negativity surrounding bonds was palpable. The economy was recovering ahead of schedule, increasing the odds that the

Fed would raise

rates hard by the end of the year. Stocks were putting on big gains, making the safety of bonds look less appealing. Raise your hand if you heard somewhere recently that bonds never outperform stocks three years in a row.

But recent action in the Treasury market suggests that investors had been a little too down on the bonds. Thursday saw the yield on the benchmark

10-year note fall below 5% for the first time since early December. The reasons were several: Some big

corporate-bond sales just got completed, and trading firms that had gone short Treasuries to limit risk as they took these bonds public had taken the shorts off. There's been a steady drone of Fed-types reminding people that the rip-roaring recovery in the economy ain't here yet.

Down -- but Out?

Possibly most notable, there's been some suggestion that stocks' struggle over the past couple of days has prompted a rash of asset-allocation trades -- investors shifting money out of stocks into bonds. "We came into the new year with the stock market overbought and the bond market oversold," says Morgan Stanley senior economist Bill Sullivan. "Now the market's adjusting."

And investors may even be coming to the opinion that their recent dour stance on the bonds was inappropriate.

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Spreads Like Butter
Difference between fed funds target, 10-year yield

Source: Federal Reserve

"People just had way too aggressive a recovery and Fed response to recovery priced into the market," says Dana Johnson, head of capital markets research at Banc One Capital Markets. Even though the economic data have continued to come in better than most forecasters expected, the economy is a long way from the sort of speedy growth that would make the Fed want to tighten hard, says Johnson. Now he reckons the market is coming around to his view.

Even if you still think the Fed's going to be cranking up rates, however, it's possible to view long-term bonds as a decent investment. For one thing, if the Fed's aggressive when it comes to tightening, you're not going to get worked up about encroaching inflation.

For another, yields are way above the fed funds rate now. Even after the recent rally, the 10-year note's yield is more than 3 percentage points above the fed funds target of 1.75%. The spread has rarely got that high, and over the past 15 years, it has usually been about 1.8 percentage points.

"What are the risks in owning bonds at these levels?" asks Sullivan, who expects the 10-year yield to touch 4.5% by midyear.

Grin and Bear

Jim Bianco, president of Bianco Research, is sticking to his bearish guns, however. While the selling got ahead of itself -- the drop in bonds from mid-November to mid-December last year was the biggest since 1987 -- he thinks the Fed is going to end up hiking rates a lot this year. For those who think the Fed's going to be gradual about shifting to rate hikes, he says to look at what happened just about a year ago. At its November 2000 meeting, the

Federal Open Market Committee thought the big risk to the economy was inflation. In early January 2001, it held an emergency meeting and cut rates by a half-point.

But Bianco says that Friday's speech on the economy could change his mind. He notes that market indications suggest investors don't think the FOMC will ease monetary policy yet again when it meets at the end of the month. But most Wall Street economists -- 19 of 24 according to a recent


poll -- think a quarter-point cut is in the cards. Greenspan is aware of the divergence of opinion, says Bianco, and is going to correct it.

So perhaps the outcome of the next FOMC meeting gets revealed Friday. And so will the answer to whether the recent move in bonds is anything better than a bounce.