Can you achieve stock-like returns with bonds?

By Lou Bartenstein Vice President, Bonds and Fixed Income for St. Germain Investments Special to PRIME> In spite of the short-term panic gripping the world's equity markets, investment firms remain optimistic about the long-term prospects of the stock market. However, there are investment alternatives. The panic of the past two months has affected nearly all asset classes. Stocks, commodities and corporate bonds have all declined in ways rarely seen in the past, with U.S. Treasuries emerging as the only apparent safe-haven for investors. This shift in investment perspectivehas created tremendous opportunity, especially in corporate bonds. Yields on investment grade bonds are now at levels unavailable in many years and the spread between these bonds and the comparable treasury bond, is at a level never before seen. Put in another way, corporate bonds are the cheapest they have ever been relative to treasuries. There is real panic occurring in high-quality fixed income, and from this panic comes opportunity. Historically, there is a tight "spread" between the interest rates on corporate bonds and treasuries. Recently, this rate spread has expanded dramatically. For example, a current yield to maturity of over nine percent has been offered with certain corporate bonds. For investors in the municipal bond market, there is also opportunity. Because of their tax free status, municipal bonds typically yield less interest than a comparable treasury. In similar fashion to the widening spread that has developed in corporate bonds, municipals are currently trading at yields higher than U.S. Treasuries. In recent weeks, the yield on treasuries has plunged below that of municipal yields, an unheard of upending of traditional investment thinking. Given this radical upending of market mechanics, it isn't too far-fetched to think of bonds as actually providing a better return than stocks. Just be aware that not all bonds behave this way. The bottom line is that opportunity abounds in today's market for the prudent investor. The current spreads are driven by fear, which will eventually subside. But remember, when the panic dies, so will the opportunity. Column provided to PRIME by: St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800443-7624; web site:www.stgermaininvestments.com