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Government bonds have enjoyed a nearly three-decade long bull run, with U.S. Treasuries bought in the early 1980s yielding a 7 percent annualized return -- the kind of growth often used to promote equity markets. But analysts at Goldman Sachs say the long-term love affair with bonds will soon come to an end.
Peter Oppenheimer, chief global equity strategist at Goldman Sachs in London, wrote in a report on Wednesday that "it's time to say a 'long good bye' to bonds, and embrace the 'long good buy' for equities as we expect them to embark on an upward trend over the next few years."
"Given the high equity risk premium (ERP), therefore, the longer-term prospects for returns from current levels in equities have a higher-than-normal probability of being good by historical standards. The very low-risk premium in government bonds suggests a higher probability of poor future returns relative to history."
The thesis behind the call is fairly straightforward: After equities reached astronomical valuations in the height of the tech bubble, they've been falling ever since, particularly in the wake of the financial crisis and the Great Recession.
Goldman says the drop in valuations and shift away from equities by investors has been too extreme. The last 10 years, for example, has offered investors one of the poorest aggregated return on equities in decades.
"The last decade has been truly striking in an historical context. The last few years have seen the worst real returns in U.S. equities (along with the 1970s) in over 100 years," Oppenheimer wrote.
In sharp contrast, bond prices inched higher and yields fell, with "the real return in U.S. 10 year Treasuries as strong as at similar points following the collapse in 1929…in nominal terms U.S. bonds have risen far more than was the case following the 1929 collapse."
Oppenheimer's bull call on equities comes as stock markets around the world have moved sharply higher in recent weeks, as investors bet that the U.S. economy is rebounding and Europe's sovereign debt crisis is easing.
Yields on U.S. Treasuries -- an asset investors flock to in times of uncertainty -- have also moved higher in recent weeks, another sign that the appetite for risk is increasing.
Yields on 10-year on U.S. Treasuries recently hit a 2012 high of 2.399 percent, sharply higher than the 2.03 percent yield reached last week.
"Risk is coming out of the market and people are getting more sanguine about the market," Gerry Brockelsby, President at Marquest Asset Management recently told BNN. "The valuation in the [equity] market…is at levels not seen since 1974."