Talk of a "great rotation" out of bonds and into equities is misleading according to investment strategy group Lombard Odier, which argues that 2013 could see the reverse happen.
Global equity markets have thrived on the back of increased risk appetite since the start of the year, with major indices including the Wall Street's Dow Jones Industrial Average and Tokyo's Nikkei 225, breaching multi-year highs in recent weeks.
Meanwhile traditional safe haven investments have sold off. Benchmark 10-year Treasury yields have climbed over 50 basis points since the start of the year to over 2 percent.
But Geneva-headquartered Lombard Odier says in its latest Investment Strategy Bulletin that investors should not get too comfortable with the current rally in equities.
(Read More: The Great Rotation: A Flight to Equities in 2013)
"A theme for 2013 might well actually be the rotation out of equities and back into bonds," Lombard Odier writes in the report.
"Far from envisaging a sustained and large equity rally on the back of a 'great rotation' our best case scenario would be for the equity rally to lose some steam, and the worst case scenario for it to experience a significant sell-off. Protect your portfolio and be ready to move out of equities back into government bonds when yields normalize."
According to Lombard Odier, the theory behind the "great rotation" is intrinsically flawed because it is driven more by supply rather than by demand. The reason investors have owned more bonds than equities over the past few years is because of a huge increase in leverage over the past decade. On the other hand, the equity market has been shrinking as companies use proceeds from debt issuance to buy back their own shares.
(Read More: Why Talk of a 'Great Rotation' May Be Overblown)