As Loomis, Sayles Vice Chairman Dan Fuss told MME last month: “When interest rates eventually rise, it will become our entire focus. I’ve prepared for this well in advance “(see “Fuss: Interest Rate Policy Will Shape Recovery,” MME 5/3/2010).

A record-setting $375 billion flowed into the $2.2 trillion bond fund industry in 2009, while equity fund assets lost $40 billion last year, to end at $3.7 trillion. Those gushing inflows from unnerved investors and a growing consensus the Fed will take the unusual move of lifting interest rates for several years, could lead to lower values for what appears to be safe, long-term fixed income.

Some believe investors would be better off in shorter-term fixed income instruments over the next five years and then moving into stocks that will undoubtedly benefit from a higher interest-rate environment.

Other industry insiders point out that few fund managers have closed their bond funds to new assets, which they at least did with technology funds at the end of the dot-com mania: “I worry that some of the opportunities afforded the mutual fund industry to learn from the past may have faded away too soon," T. Neil Bathon, founder, FUSE Research Network, Boston, tells MME. "The flood gates remain wide open in terms of flows into fixed income funds. Many experts seem to feel that we are at or near the beginning of a sustained bear market  for bonds.”

But investors can only think of the devastating stock market years of 2000 and 2008—and so they continue to pour into bonds and bond funds, The Wall Street Journal reports in today's “Fund Track” column.

“It’s fallacious reasoning that you can’t lose money in bonds,” James Swanson, chief investment strategist at MFS Investment Management, told WSJ.

“People are conditioned to push the ‘fixed income’ button because for nearly 30 years you didn’t have to do anything to make money,” noted Bill Eigen, portfolio manager of the J.P. Morgan Strategic Income Opportunities Fund.

“A multiyear move of rising interest rates is an environment that most people haven’t seen before,” added Tom Atteberry, co-manager of FPA New Income Fund.