Gaffney thinks the yield curve will start to flatten and this will cause high-yield bonds to be repriced. "Equities are a risk worth taking," she said. Her bond fund has 20 percent of its assets in cash and she wouldn't mind having more. But as Bernstein observed, bond fund managers as a group have their durations as short as they have ever been.

One of the few spots in the bond market that Bernstein likes is high-yield municipal bonds. Why? Because high-yield U.S. munis are yielding 125 basis points more than Iraq's sovereign debt. Before ISIS overran much of Iraq, low-rated American municipal bonds were paying 2 percent more.

America may have Detroit and Stockton, Calif., but one quarter of the nation is not controlled by the likes of ISIS. Yet the flood of money into emerging markets' debt has driven their prices to the point where such pricing distortions are occurring the global bond market.

So what could go wrong? Europe for one. "The European Central Bank will go down in history as the worst ever," Bernstein said. "They have violated every basic rule of central banking." In fact, he noted the ECB has been tightening for the last two years while Europe's corporate sector has been deleveraging and many European nations have been teetering on the brink of another recession.

Bernstein also remains unusually bearish on emerging markets. In his view, they were the major beneficiary of the global credit-market boom of the previous decade and they will continue to be a leading victim of deleveraging.

Inflation and low wages have been triggering riots and protests in many emerging nations, starting in 2011 with the Arab spring and spreading to more established countries like Brazil and Turkey this year. "Why is that a good story?" Bernstein asked, adding that it might be if you were invested in tear gas and mace.

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