Despite the seemingly inescapable credit crunch, that truism lives on today. While stocks and commodities have been pummelled, government bonds have been shining. An almighty flight to safety led investors from stocks, commodities and property markets to cut their losses, sell up and retreat to the safety of “risk-free” government bonds.
That bull market could come to an abrupt end sooner than many were expecting. In its place a new bull market in corporate bonds is building up steam.
Government yields are practically zero
Despite the guarantees across market sectors across international regions, it has been incredibly tough to convince investors, banks and pretty much all market players to put their cash into risky assets, like shares.
According to Société Générale, cash rich companies and investors alike have been seeking the safety of the short-term government debt market. In so doing, as is always the case with too much demand, the yields on these bonds has been pushed to dramatic lows. The yield on 3-month gilts is just 0.92%, down from 4.3% 12 months ago, and interest rates are still falling. That means that any new bonds issued by the Debt Management Office will carry even lower yields.
In the US it’s even worse, with yields on the equivalent bond actually at a pathetic 0.11%. Such was the fear in the market, investors were willing to earn just $1 for every $1,000 invested, effectively just parking money in a safe and liquid place.
While appropriate in the wake of the Lehman Brothers collapse, this behaviour no longer makes sense.
Risk-free cash is earning zero interest. The desire for some return will force investors to seek other places for their money. However, this is not a reason for stock market investors to get excited. It’s unlikely that the money market crowd is going to make the extreme leap from risk-free bonds to stocks. This could, however, be good news for the middle ground, corporate bonds.
Why good quality company debt could be an outstanding opportunity
When bond yields are so low, and investors are less panicked, they begin looking for higher yields again.
Sensing a turn in the market, corporate bond issuance soared last week to its highest weekly tally in 8 months, Bloomberg data show, with $41 billion worth of bonds issued. Last week's tally was roughly double that seen before the credit crisis began, and roughly equal to the tally for all of last September and October when the credit markets froze. And, as bond specialist Tony Crezcensi from investment firm Miller Tabak notes, “there were a host of companies selling to yield-hungry investors.”
So what's the smartest play on this trend? Don’t go straight in, dip your toe into the risk pool by following the Government. Look at government guaranteed bonds such as Lloyds TSB or Nationwide. I’m no bank bull, but if these companies boast the same guarantees as a government bond and offer better yields, it seems like a good opportunity. These bonds carry a AAA credit risk rating and offer 4.2% and 4.6% more yield respectively.
Without risk, there is no return, and right now that is truer than ever. Today, the only reason to stay in the government bond market is irrational fear. As investors get a little bit braver and a little bit greedier, a bull market in corporate bonds could form in 2009.
Best wishes,
Theo Casey
For Fleet Street Daily
P.S. In the coming weeks, we’ll be following this story through with a specific recommendation on how to play the great “money shift” to corporate bonds in The Fleet Street Letter. We’ve found what we believe is the best way to play it. To be in line to receive this timely advice, why not join our group of investors? While you’re waiting for the bond play to come, you’ll find another outstanding way to protect – and grow – your capital using our smart “anti-sterling” position. Read about it here.
Why gold has been a great investment in 2008
BY FRANK HEMSLEY
Where’s been the best place for a UK investor to park a thousand pounds over the past year?
The chart below, courtesy of BullionVault.com might surprise you. It tracks the value of four key investments in 2008. The red dotted line – just so you can get your bearings –marks the day of the run on Northern Rock, back on 14 September 2008.
It’s not the stock market – but I guess you knew that already. £1,000 dropped into the FTSE would have dropped even further to around £755 – a loss of 24.5%.
Another horror story of 2007/2008 vintage was the residential property market. Based on the percentage fall in the housing market since 1 January 2008 over the year, your £1,000 would be worth around £870. That’s a little better than the stock market – but still pretty miserable.
Of course, with the horrors in the global economy following the start of the credit crunch, perhaps you made the smart move of moving into cash. Fair enough – it saved you the losses you would have made in the stock market. But you’ve not made much – perhaps 4.5% if we’re generous, turning your £1,000 into £1,047.
Hardly the stuff of dreams – but then at least your money’s been “safe” (as safe as it can be in a bank…)
But as the chart shows, where the real money has been made for UK investors in 2008 is in gold. In sterling terms, as our currency has collapsed, so the value of our gold investments has rocketed by 40% in 2008. That has turned a £1,000 investment in gold into £1,400 – not bad for a lump of metal.
Of course, as Adrian Ash of BullionVault.com who sent me this chart, notes: “The outlook from here may come to look less dramatic. But for as long as the government tries to destroy the value of Sterling in a bid to inflate away debt (both public and private), Gold Investment – if owned outright and free from all credit-default risk – may still perhaps prove a decent home for a chunk or two of your wealth.”
The Daily Reckoning – The great American Ponzi scheme
BY BILL BONNER
Give us Madoff! Give us Madoff!
“Oil rises to $39 on Bernanke comments...”
“Asian stocks rise after Bernanke remarks...”
When they turned out the lights and closed the doors in New York last night, the Dow had lost 25 points and oil had gone down to $37.
But this morning, investors seem to be feeling better about things. What did Bernanke say to bring about the turnaround?
We find the report on the front page of the International Herald Tribune:
“More capital injections and guarantees may become necessary to ensure stability and the normalization of credit markets,” said the main man at the Fed, speaking to an audience at the London School of Economics.
He went on to say that he didn’t necessarily like bailing out Wall Street, but it “appears unavoidable.”
Nothing particularly exciting about that. But then we turn to page 12:
“Bernanke warns that bigger bailouts needed around the world,” is the money headline.
And then, the report gets down to business. The world economy is dangerously ill, says Dr. Bernanke, or words to that effect. We’re going to have to try some experimental drugs to rescue it.
“Beyond buying troubled assets from banks, Bernanke said, another option was to provide asset guarantees under which the government would absorb part of the banks’ losses in exchange for warrants and other forms of compensation. [Of course, if the banks had any means of compensating investors they wouldn’t be in this fix.]...
“Bernanke also expressed support for the idea of creating a so-called bad bank that would allow the government to buy financial assets in exchange for cash or equity.”
Here is where we laughed so hard we thought we might damage our midriff.
You can read the Daily Reckoning in full here
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