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Time for Income: Time for Bonds?

Marc Courteray's disclaimer at the end -- "Please Note: This article is to inform your thinking, not lead it" -- is always refreshing since the reader ends up where he/she was before reading the piece -- aware that she/he must weigh all arguments and make his/her own decision on the inflation/deflation issue. To be sure, looking ahead, relative inflation would be conducive for a better investment climate then would a persistent deflationary environment. I add a thought to consider. My reading of Seeking Alpha comments over past couple of months suggests that the majority of investors inflation will win and is not too far off. With a bias for contrarianism, this makes me more receptive to the Japanese experience argument meaning deflationary pressures will persist for at least a decade during which making money in equities or bonds for non-trading investors will be extremely limited, especially those holding 401 and the like retirement plans.

Regardless, Mr. Courtenary's assertion: "Only you can decide the best place for your money" is the only sure thing, understanding that you may be wrong. Investing is a chess game.

The Riskiness of Bonds

Felix, this time I agree with you on about every point, especially regarding being cautious about buing investor-grade corporate bonds of more than four or five years maturities. Your inflation scenario resulting from massive monetary expansion is credible, but I have one caveat: the timing of the deflation/inflation switch. No one knows, of course, but my guess. for what's its worth, is that the inflationary cycle will begin at more likely than not at least two years or three years out. So, money in investment grade corporates of three to five years do not to me appear to be putting one's capital in these assets at much risk. (Please, however, don't ask me about my AIG bonds).

Is Buying Bonds Really a Good Idea?

Felix, it would be helpful if you did not write about the bond market as if it were an either or situation, considering them regardless of type or issuer as having essentially the same risks. The differences between treasuries, investment grade bonds, and distressed (or junk) bonds are, and traditionally have been through historical financial crises, enormous.

When you write that conventional wisdom is that bonds have been safer than stocks, then add, "this may no longer be the case," you are assuming that today's global financial crisis is transformative unlike any other in history. I think not. We have short memories and great financial havoc has besat this country many times before, not just in the 1930s. True, each recession and depression is different, but one thing they have in common is that each ends and the normal rules of investing and safety return.

That being said, consider that a few insightful and far-looking buyers in the Great Depression purchased defaulted general obligation municipal bonds. They understood that at some point the issuers had to pay off those obligations. New York City, Florida, etc., could not be liquidated. Consequently, fortunes were made by investors who understood the difference between short and long term risk and who, above all else, had the means and the PATIENCE to wait it out. To invest in U.S. Treasuries right now, I agree, may be the worst possible time. But it is wrong to tie long-term Treasury investments in investment grade (versus distressed) bonds. Both general obligation municipal bonds and investment grade bonds may ebe the best long-term investments (vis-a-vis speculations) available today.

Yes, I know most of us have serious doubts about Moody's and Standard & Poor ratings, but they assess the financial risks of companies on the whole very well, with a few huge exceptions notwithstanding such as AIG. Still, when one invests in bonds in companies such as CT or GE and holds them until maturity, that would be be more prudentfor a conservative investor (more than ever will be around for the than in vesting in stocks and holding them for the next decade.

Nonetheless, your article expressing investors be cautious when it comes to bonds is correct, but the thesis does not extend to the entire class as you have suggested.

Which Is Safer: Investment Grade Corporate Debt or Government Bonds?

IEric hit the homerun ball in this article. Investment grade corporate bonds purchased from August through November 2008, with maturities of one to five years, especially those of double or tripple A banks and insurance companies in comparison with US treasuries of any maturity, looking back in retrospect at the end of December would have been the best play for conservative investors. The yield to maturity ranged between six and one-half to over nine percent. The ratings on these bonds with few exceptions have remained high investment grade and their values have risen considerably in last four to five weeks. When the masses run in fear to treasuries and ignore investment grade bonds, they will surely lose, especially when they invest in maturies longer than a few months and and hold. Though yields have fallen considerably during the past month, investment grade financial corporate bonof medium duration are still a sound investment for conservative investors who do not trade.

Corporate Bonds Haven’t Been This Cheap Since 1932

So true, especially if one buys bonds coming due in one to four five years which are not spooked by risk of high inflation likely three years out and beyond.