Every instinct should suggest that this is a bad time for fixed income investment. Inflation is running at around 7%, with more pain on the way as energy and food price rises bite and companies pass on higher input costs. Interest rates are rising and central banks around the world have been unwavering in their commitment to tackling inflation.

However, one recent statistic should give investors pause for thought: in a recent analyst note, JP Morgan pointed out that fixed income allocations are at their lowest level since before the Lehman crisis in 2008. It said its estimates show that bonds made up just 18% of non-bank investors’ portfolios globally at the end of the first quarter. Redemptions from fixed income funds have picked up rapidly since the start of the year.

This unwinding of the bond ‘bubble’ has been a long time coming, but there are already suggestions that it might have gone too far. Investors have assumed a continued rise in inflation and interest rates that may not materialise and could be left with little portfolio protection should the world economy change direction.

Why might that happen? A de-escalation of the Ukraine crisis would see some normalisation of energy and other commodity prices. Interest rates rises may work to curb inflation quicker than the current forecasts suggest. A resolution in supply chain disruption in the wake of the pandemic may bring consumer prices down again. Equally, some Wall Street analysts are expecting the US to dip into recession next year. None of these events look likely, but they are not implausible and would change the outlook for bonds.

It also means that investors are long risk assets – fixed income allocations are generally being diverted into the stock market. Again, this appears to be a perilous choice at a time when there is so much uncertainty in the economic outlook. Investors may be getting rid of their insurance policy at a moment when it is becoming cheaper.

The bond market has moved a long way very quickly. There may still be further adjustments ahead but there are scenarios in which fixed income could do well. Investors need to ensure that in their enthusiasm for getting rid of their fixed income holdings, they don’t leave themselves vulnerable should the world’s economic fortunes not play out as expected.