A month when Mexico has issued a 100-year bond yielding 6 per cent seems the right time to revisit the value (not) on offer in government bond markets and question the assumption that quantitative easing is good for bond prices.

Looking first at Mexico, even by the standards of financial markets, memories are short to a degree worthy of a nanotechnology patent. According to DataStream's record of Mexico's consumer price index, its inflation rate has averaged 18 per cent in the 69 years to 2009. Put another way, what would have cost 1 centavo in 1950 cost 136 pesos in 2009, more than 13,600 times as much. Given the history, it is asking a lot to assume that the 5.2 per cent inflation rate of the past decade will be perpetuated for the next century. Even then, the bonds would barely give a positive real return (before tax). The Mayans, whose knowledge of mathematics was streets ahead of their mediaeval contemporaries elsewhere, would presumably have had a sombrero pinion.

Even the UK, which was regarded as a better credit than Mexico for most of the past century, has debased the value of bond investors' capital alarmingly since 1909. The UK's inflation rate has averaged 4.2 per cent for the past 100 years but the level of gilt yields in 1909 was only 3 per cent. So, investors in 1909 would (even before tax) have only been compensated for two thirds of the inflation over the succeeding century [source: Barclays Equity Gilt study 2010].

So, it makes little difference whether emerging markets are taking over as the world's better credit risks or trading off their own history. A 6 per cent 100-year fixed yield is unlikely to deliver a real return that one could forecast with confidence.

The picture is little better looking at mainstream markets. The 50-year gilt yields just under 4 per cent. This would (just) preserve investors' wealth if they could invest their coupons free of tax and if inflation was just under the current 100-year average. If they pay basic rate tax, investors are heavily reliant on the Bank of England meeting its 2 per cent inflation target to enjoy a real return of capital, let alone a real return on capital. High rate payers are sunk.

Many governments are currently wrestling with the problem of having eaten half of tomorrow's lunch yesterday. They have too little food to feed tomorrow's demands. Either they have to raise farm yields (taxes), reduce portion sizes (spending) or pay their caterers in IOUs (guilt-edged securities) of uncertain future value. Although caution about the near-term economic outlook can justify projecting current low interest rates for the next few years, investors appear to be asking for very little safety margin in return for lending governments money for periods above ten years. This is all the more trusting, given that governments can influence the value of the currency in which bonds are repaid. Higher inflation is a temptation and (increasingly) a hinted-at policy objective.

The prevailing assumption seems to be that central bank money creation to purchase government bonds [QE] will automatically be good for government bond prices. It is certainly true that in the immediate future having a big buyer means that bond prices will be higher than they otherwise would be, by alleviating the pressure of financing the current swollen deficits. However, a policy that shows a clear preference for raising inflation rather than suffering renewed recession has mixed messages for bonds. If central banks are right to worry about recessionary pressures, bond yields could remain low because people will seek them out as safe havens in a low interest rate world. However, if QE succeeds the opposite would apply - inflation risks would increase and the safety premium would evaporate. In that environment, the least that would happen to gilt yields is that they would rise 0.5 - 1 per cent to the levels seen in the spring (when equity confidence was greater). Longer-term, the range of outcomes includes much greater rises in yields (if the authorities condone inflation over 5 per cent). The risks appear tilted in the direction of gilt investors losing money, in nominal and real terms in coming years.

Even before the recession or recovery debate is resolved, gilt prices could fall if investors felt that other assets offered greater value. This did not happen over the summer, since there was no consensus over the attraction of equities given fears of a double-dip. If the economic picture continues to point to a sputtering recovery rather than recession (kangaroo petrol rather than reverse) investors may increase their appetite for the higher, and potentially growing yields on equities rather than the low and fixed yields on bonds.

After a quarter century of falling inflation, it is commonplace to view bonds as low risk, whereas in reality the main risk to which they are vulnerable has been in abeyance. Given low yields and rising inflation prospects, one seasoned bond investor in 2009 referred to government bonds as offering 'return-free risk'. The risk is that they are over-owned, just as the inflation cycle is turning upward.

Equities would certainly not be viewed as low risk, after ten years of underperforming cash and 20 years of underperforming bonds. However, their returns are linked to the performance of the world economy (which is probably past its worst) and unlike a decade ago they are not expensively rated. Buying equities, which have derated, at a time when they are widely distrusted and under owned is contrarian but, as Warren Buffett has observed, 'Socks or stocks, I like buying quality merchandise when it is marked down.' Remember the word 'quality'.

Andrew Bell is chief executive of Witan Ivestment Trust