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Mass exodus from bond funds isn't likely

In the middle of December, we will be treated to an updated version of one of the greatest stories ever told, the Exodus of the Israelites from Egypt who were led from bondage by their warrior/prophet, Moses.

Their years in bondage and their escape from Egypt to the promised land has been a story that has resonated with not just the Jewish people but with all who seek the freedom to determine the course of their lives.

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On Wall Street, human bondage has taken on a different connotation of late, the notion that investors have been tethered to U.S. Treasury securities, in a certain sense, against their will, lacking the certainty of a safe-haven investment for their hard-earned savings.

Some, and this is not entirely new, have been predicting a mass exodus from bonds and bond funds by both retail and institutional investors, once it becomes clearer that the Federal Reserve is about to let its interest rates go — in this case, go up.

While I have never been a fan of bond funds, given their infinite maturities and their relatively high costs, I am not sure such a rush to the exits will, necessarily, take place in the near future.

First, I remain unconvinced that the Federal Reserve has the desire, nor the latitude, to normalize interest rates in 2015.

Looking at the direction of global rates, which is down, and dramatically so, the intercontinental threat of deflation is almost an existential one.

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Yields on 10-year German bunds are below three-quarters of a percent.

10-year Japanese government bonds yield well less than half a percent.

10-year Spanish bonds yield about a tenth of a percent less than comparable U.S. Treasurys — an unthinkable divergence, given the vast difference in credit quality between the two.

The premium that U.S. Treasurys are paying over sovereign debt around the world is far too wide, particularly in a period in which the dollar is rising, making U.S. assets that much more attractive to overseas investors.

In addition, inflation measures here at home continue to defy a lack of gravity and are falling well below the Fed's 2-percent target.

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This week's GDP data showed broad price pressures well under control, and with the continued and persistent drop in oil prices, they are likely to remain so in the near-to-intermediate future.

Add to that some recent estimates suggesting that there will be a deficit of available U.S. Treasurys next year as demand outstrips supply for high-quality U.S. bonds by as much as $400 billion dollars.

Even as the Fed exits the stage (via the elimination of its bond-buying program) there are ready and able buyers willing to step up and bond themselves to U.S. debt.

So, while many fret that the financial community is ready to let its people go out of bonds, that could be a mistaken assumption.

I happen to eschew investing bond funds in favor of owning bonds outright. There is a date by which one's principal will be returned without risk of capital loss.

That cannot be said of bond funds, whose capital values, rise and fall with the changing direction of yields. If one suffers a capital loss on a bond fund, he, or she, must wait until the next cycle of lower rates to recapture the lost principal, while hardly getting compensated for either the opportunity cost of not investing elsewhere, or the purchasing power that might be lost while waiting for a more timely exit.

So, in this season where the exodus has come upon as a meme again, I doubt that it will take place in the bond market anytime soon.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also editor of "Insana's Market Intellgence," available at Marketfy.com. He delivers a daily podcast, "Insana Insights," and a long-form weekly version, both available on iTunes and at roninsana.com. Follow him on Twitter @rinsana.