According to Mark Hulbert, bond market newsletter writers are the most bullish since 2001:

ANNANDALE, Va. (MarketWatch) — You have to go back almost nine years to find a time when the editor of the average bond timing newsletter was more bullish now than he or she is today.

These timers’ current bullishness doesn’t bode well for bonds, unfortunately, at least according to contrarian analysis.

Consider the Hulbert Bond Newsletter Sentiment Index, which reflects the average recommended bond market exposure among a subset of short-term bond timing newsletters tracked by the Hulbert Financial Digest. It currently stands at 56.7%, after having gone as high as 62.2% last week.

The last time it was higher was March 28, 2001, when the HBNSI stood at 62.7%. Far from rising thereafter, bonds plunged and interest rates rose. Over the subsequent two months, in fact, the CBOE’s 10-Year Treasury Yield Index /quotes/comstock/20m!i:tnx (TNX 34.43, +0.37, +1.09%) rose from 4.97% to 5.55% — a big jump in so short a period of time for the normally-staid government bond market.

As I noted in last week’s update, bond funds are seeing massive inflows while stock fund flows are treading water. As a contrarian, I see this as bearish for bonds, but not necessarily bullish for stocks. Higher inflation is not good for stocks any more than bonds and higher interest rates will compress valuations. Higher rates would also likely introduce a lot of skepticism about the recovery.

It really depends on why rates head higher; if rates head higher because growth is rising, stocks will do well until the peak. If rates move higher because the dollar is falling - inflation - real estate and commodities will be the best option. I suspect it will be a bit of both for now, but inflation is the real story.