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A Comeback for Corporate Bonds


If you didn’t act already, you may have missed out on an opportunity from our “Comeback Stocks for 2009” slideshow of Dec. 24. But even if you didn’t profit, this particular comeback is a good sign for all investors, evidence that sanity may be returning to parts of the financial system.

Rob Lutts, chief investment officer at Cabot Money Management, recommended the Calamos Convertible & High Income Fund (CHY). No, it’s not a stock, but Lutts argued in our piece:

“Fixed income is the new equity,” Lutts says, arguing that 2008’s sell-off in corporate bonds creates opportunities for investors to get large equity-size returns from safer bonds.

More on what Lutts said more than two weeks ago: He told me corporate bonds were “simply taken out and shot” in the market turbulence of 2008. Bonds issued by “a lot of good, quality companies” were trading at cheap prices. “You can actually get equity returns with a lot less risk in many areas of the fixed income market,” he said. (Bonds are less risky than equities because, in case of a bankruptcy, bondholders have priority over equity shareholders.) “We need to repair the fixed income side of the market first” before equities can really recover, Lutts said.

The Calamos fund is up 35% in the past month and 15% in the last two weeks. That’s an astounding move for a fixed income investment.

And it reflects real changes in the corporate bond market. Bespoke’s blog noted that high-yield bond spreads narrowed for 13 days in a row, the longest streak of declines since 2003. Bespoke adds:

Make no mistake that at current levels high yield spreads are still extremely high, but given the widespread view that the market cannot stage a meaningful rally until spreads begin to narrow, the current move is a step in the right direction.

Maybe these are unsustainable gains, evidence of 2008’s volatility carrying over into the new year. But maybe investors’ appetite for risk is gradually returning?


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