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IF THERE is a consensus bet for 2014, it is that equities will continue to outperform government bonds, as they did in 2013. But the odd thing is that, if investors relied on the usual fundamental factors, the evidence would seem to point in the opposite direction.

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When it comes to bonds, inflation has generally been the key determinant: rising prices reduce the buying power of fixed-interest payments and principal. The 1970s was a catastrophic decade for the bond markets. But in 2013 the general trend has been for inflation to fall, while bond yields have risen (see chart). That is an odd combination.

Headline inflation in America is just 1.2%; even in Britain, for the first time in four years inflation is almost back to the Bank of England’s 2% target. The decline in inflation has been so remorseless that parts of the developed world may be slipping into deflation. Both Greece and Cyprus have had an extended period of falling prices. Dario Perkins of Lombard Street Research used an index of deflation risk, created by the IMF back in 2003, to assess whether the rest of the euro zone faces the same danger; it puts the chance of falling prices at 50% or more in Estonia, the Netherlands, Portugal and Spain.

Deflation is a problem for highly indebted economies because the value of debt is fixed in nominal terms, but the ability to service it suffers as incomes decline with prices. Furthermore, because central banks cannot force interest rates below zero, deflation means that real interest rates must always be positive.

With its ageing population and sluggish growth, the euro zone bears a worrying resemblance to Japan. Japan’s banks shrank their balance-sheets in the early 1990s as its bubble deflated; Europe’s banks seem to be following the same path. In the euro area, loans to the private sector fell by 1.4% in the year to October, while loans to non-financial companies fell by 3.7%. Broad money-supply growth slipped to an annual increase of 1.4% from 2% in October.

Japan’s recent policy shift may also exert a mild deflationary influence on the euro zone. The introduction of Abenomics has caused the yen to weaken; it has dropped by 22% against the euro in the past 12 months. That makes Japanese exports more competitive, putting pressure on European businesses.

Lower import prices have a positive side. To the extent that they reflect lower commodity prices, they are good news for consumers. The effect is equivalent to a tax cut. But they make it more likely that the euro zone could fall into outright deflation; with the headline rate at 0.9%, there is little margin for error.

Deflationary scares have in the past been good for government bonds. But the market seems more worried about the actions of the Federal Reserve, which is expected to slow its asset purchases over the course of 2014 (its open-market committee was meeting as The Economist went to press). It is difficult to tell to what extent bond yields have been depressed by this “quantitative easing”. But since the Fed hinted in May that it might soon slow its spending, yields have risen by around a percentage point.

On a crude measure (subtracting the current inflation rate from the ten-year yield), real Treasury yields have risen by almost three percentage points since the start of 2012. At around 1.7%, the real yield on ten-year Treasuries is close to the average real return American fixed-income investors have earned since 1945.

In contrast, American equities are trading at a cyclically adjusted price-earnings ratio of 25, well above the historical average at a time when, as already noted, profits are coming under pressure. In the past investors who bought shares trading at such a high multiple barely earned a positive real return over the subsequent ten years, according to Cliff Asness of AQR, a fund-management group.

And yet investors are increasingly taking money out of bond funds and piling into equities. They seem convinced that economies are returning to the Goldilocks conditions of the 1990s in which growth is strong while inflation is positive but subdued. There is scope for a nasty surprise in 2014.