There’s nothing like a new year to catch investors out. At the end of 2008, everyone was talking about the pound hitting parity with the euro; only weeks later, the same commentators think the run on sterling could be over.

The pound has jumped more than 7% against the euro to €1.13 over the past week, with traders relieved the Bank of England reduced interest rates by “only” half a percentage point to 1.5%. A bigger-than-expected cut would have suggested panic over the economy and hit sterling hard.

It’s the same in the commodity markets. Virtually everyone was betting against oil at the end of 2008, with Goldman Sachs retreating from its $200 forecast when it said crude could hit $30 by March.

Instead, oil has leapt nearly 9% over the past month. It briefly went above $50 early last week, although it had dropped back below $40 by Friday.

Even the FTSE 100 has been stronger than expected, led by resurgent miners. Followers of the January indicator — and there are quite a few — will be drawing comfort from the fact that it signals a positive year.

In eight of the past ten years, the first day’s market direction has foreshadowed the outcome for the next 12 months and the FTSE 100 was up nearly 3% on January 2.

If at the close of business on the fifth trading day — Thursday — share prices are higher than they started the year, the chances are they will end the year higher. The Footsie had risen 1.61% by that day. Not that I put great faith in such indicators, but it does show how quickly market sentiment can change.

The biggest surprise — and the most worrying for ordinary investors — has been in the bond markets. Government bond funds were among advisers’ hot tips for 2009, with prices expected to rise further as interest rates around the world were cut to record lows.

UK gilts was the most popular sector among retail investors in October, with an inflow of £154.8m, according to the Investment Management Association. Corporate bonds took over the following month, but government bond funds remain in demand. The Franklin Templeton Global Bond fund and Investec Sterling Bond fund are both in adviser Hargreaves Lansdown’s top ten bestsellers in December.

Stockbroker Killik even reports investors coming in with wads of cash they’ve taken out of deposit accounts to put into gilts. It exaggerates but there’s no doubt investors are putting a lot of faith in government debt.

It increasingly seems that this faith is misplaced. Yields on benchmark ten-year UK bonds, which show your income as a proportion of the price, had risen from 3.32% at the start of the year to 3.49% by the end of last week, meaning prices had fallen.

Analysts are talking about the return of inflation — a worry if you’re a bond investor because then interest rates tend to rise and bond prices fall. David Karsbol, chief economist at Saxo Bank, even thinks rates could be on their way up again by March.

What’s changed? The UK plans to issue an unprecedented £146.4 billion of debt in the year to March 31; Barack Obama plans billions more to plug America’s $1 trillion budget deficit.

Ominously, Germany’s sale of 10-year bunds last week attracted the least demand in six months, suggesting there will not be enough demand to soak up this supply — and that’s bad news for prices.

A month ago, Killik and investment manager Legal & General warned of a bubble in conventional gilts and tipped index-linked bonds. With all the talk of deflation, they looked isolated; now they’re looking clever.

If you want to take your money out of a deposit account for a better return, and you take a long-term view, Killik recommends the 2.5% index-linked Treasury stock maturing in August 2013. Your income will rise in line with inflation, as will the capital you get back at maturiy. Killik calculates you’d get a return of 25.4% over the term assuming inflation of 3% — or 6.35% a year, not bad in this climate.

You could consider Tesco bonds yielding 5.41% and National Grid at 5.76%. There is a chance of default, but the market rates these companies less likely to fail than the UK government, so they’re certainly worth a look.

Kathryn Cooper is editor of the Money section

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