We're being told that now is the time to buy corporate bonds. But Harvey Jones has heard this story before. Is it different this time?
To everything there is a season, although lately that hasn't been the case with corporate bonds.
Analysts have regularly argued that everything will soon be coming up roses with the sector, but every time the blossoms of recovery have withered and died.
Last year, I finally fell for claims that there had never been a better time to enter the sector and invested several thousand pounds in various bond funds, only to see them instantly shed 20% of their value. They still haven't recovered.
Now everybody is talking up corporate bonds again, and investors are piling in. The sector was the best seller in December, January and February, according to the Investment Management Association.
So will it be yet more brickbats for corporate bonds, or finally, a bouquet?
Party poopers
During the boom years, when equities were putting on their gladrags and enjoying the party, corporate bonds, particularly investment grade bonds, sat forgotten the sidelines.
Even when stock markets faltered in the early stages of the credit crunch, investors snubbed them. Up until August last year, inflation was the major worry. That spelled more bad news for bonds, which pay a decent, fixed income, which is no hedge against inflation.
Things went from bad to worse. Corporate bonds were seen as dull and boring, but at least they had the virtue of being safe and solid. Then the US authorities allowed Lehman Brothers to fold, and the bank's bondholders lost everything.
Suddenly, corporate bonds didn't look safe at all. Dull and dangerous makes a deadly combination. Many investors stopped buying bonds, or sold what they had.
Extreme pricing
Times change. Right now, the major worry is deflation, and a decent, fixed income suddenly looks pretty damn sexy, especially when you've just discovered that your bank or building society has slashed the savings rate on your deposit account to 0%.
When interest rates and inflation are low, corporate bonds do well. So all-time low interest rates and deflation should spell bonanza time for the sector.
But that's not the only reason corporate bonds look tempting. If you thought stock markets had priced in plenty of negative news, corporate bonds are even more extreme. They are currently priced on the assumption we are going through another depression. That's right, back to 1931-32. This dismal assessment is in large part due to the shadow hanging over bonds issued by the big financials.
Now who knows, we might be heading into a global depression. But if we're not -- and you're old enough to make up your own mind on that one -- then corporate bonds could be astonishingly cheap right now.
Early to rise
Investment-grade corporate bonds always rally first after a slump, followed by stock markets, with house prices bringing up the rear. So if you want to be in the vanguard of the recovery, consider corporate bonds.
But the sector has been tipped before, without fulfilling its promise. Why should it be any different this time?
I asked Mark Dampier, head of research at Hargreaves Lansdown, and he told me that he is energetically buying corporate bond funds. "Any recovery will appear in corporate bonds before we get a sustained equity rally. What we are seeing now is a bear market rally in equities, but bonds will recover first."
But it will take time. "You will have to be patient, but at least you will get an income of between 5% and 7% while you wait. That is tax-free inside an Isa or Sipp."
He is dividing his money between Invesco-Perpetual Corporate Bond (which currently yields around 7%), Jupiter Corporate Bond (5.1%), M&G Strategic Corporate Bond (4.8%) and M&G Optimal Income (6.3%).
But he avoids bonds exposed to financials, such as offerings from Old Mutual and New Star. "They are still too risky, although when financials do take off, they could really steam ahead."
But what about inflation?
So there are good arguments now for investing in corporate bonds, but then there were before.
If inflation hasn't really been tamed, as some analysts claim, this could prove that yet another false dawn.
The Treasury has also indicated that it may start buying up corporate bonds in a bid to inject liquidity into the economy. It has promised to do this in relatively small tranches, to avoid distorting the market, but it remains to be seen what impact this will have on prices.
So don't put all your faith in corporate bonds, but even I have to admit that events do seem to be moving in their favour.
You can see what Fools saying about gilts and corporate bonds on this discussion board.
