In what ways do institutional asset managers create a rod for their own backs ? The most widespread, and probably the most damaging to the interests of end investors, is in benchmarking. Being assessed relative to the performance of an equity or bond benchmark effectively guarantees (post the impact of fees) the institutional manager's inability to outperform that benchmark - but does ensure that in bear markets, index-benchmarked funds are more or less guaranteed to lose money for their investors. In equity fund management the malign impact of benchmarking is bad enough; in bond fund management the malign impact of 'market capitalisation' benchmarking is disastrous from the get-go. Since a capitalisation benchmark assigns the heaviest weightings in a bond index to the largest bond markets by asset size, and since the largest bond markets by asset size represent the most heavily indebted issuers - whether sovereign or corporate - a bond-indexed manager is compelled to have the highest exposure to the most heavily indebted issuers. All things equal, therefore, it is likely that the bond index-tracking manager is by definition heavily exposed to objectively poor quality (because most heavily indebted) credits. Given that we are living through a once-in-a-generation crisis in the bond markets, chances are that this game will not end well for benchmarked managers

David Fuller's view My suggestion to all subscribers is that you keep an eye on long-dated government bond yields, particularly those in the USA (historic & weekly), whether you hold any of these or not. There is an understandable amount of complacency in the T-Bond market, given the 30-year plus bull trend in total returns (historic & weekly).

All long-term bull markets end badly, because they become very overextended, overvalued and events eventually change. US T-Bonds will be no exception.

You will see risks increasing first in the actual yield. A close above 2.1% for the 10-year yield shown above, which holds for more than a few days, will be the first warning, especially if this is accompanied by a reduction in quantitative easing (QE). The second warning will occur on a break above 2.5%, clearly taking out the October 2012 and March 2013 rally highs. The next psychological level will be triggered on a rally above 3%. At 4% we will have a degree of pandemonium in the US bond market, and investors focussed on the total return chart will be experiencing some significant profit erosion since the bull market highs were seen. Meanwhile, on the Merrill Lynch 10-Yr Total Return chart above, a close beneath 1965 would be a major warning.

The gradually deteriorating bond market has been helping to support the stock market recently, as some money has been moved from fixed interest investments to equities. This may continue for a while, and almost certainly over the medium to longer term as the global economy gradually recovers. However, rising bond yields and diminishing QE will unsettle equity investors at some point.

Perhaps only Mr Bernanke knows the precise timing, although he may not have made up his mind yet. He may also hope to leave the decision to his successor. Nevertheless, the first reduction in QE, whether it occurs relatively soon or at some later point within the next two years, is likely to be unsettling for markets. Once it occurs, investors will also discount further reductions in QE.