More Headwinds for Corporate Bonds

Let's assume, just for the sake of argument, that there are people who will call upon the Federal Reserve to lower interest rates if given the slightest chance to do so, just to see what happens. You know, kind of like a cuckoo clock that does not tell time, but I digress.

Oh, and for those of you keeping score, here are few of the things that have happened since the close of business on Aug. 16, 2007:

Period Total Returns (New rate-cut era)
Russell 3000	5.57%
Dollar index	-6.83%
Spot gold	20.21%
Ten-year TIPS breakeven rate	0.14%
ML Government Master	4.72%
ML Investment-Grade	3.16%
ML High-Yield	1.87%

You knew the dollar got hit and that gold and inflation expectations rose. Were you aware that the total return on stocks -- even with the carnage in the financial sector and the prospects of a weakening economy and lower profit growth -- exceeded that of bonds?

One explanation for this, first raised in a May column on equity shrinkage, is that American assets are being priced more for control than for mere ownership. With American stocks underperforming most of the world -- a sorry state of affairs addressed a few weeks ago -- and the dollar on its derriere, deals such as the Abu Dhabi Investment Authority's infusion of capital into Citigroup (C - commentary - Cramer's Take) will become more common.

And did you know that high-yield bonds, often posited as more equity-like in their return profile, underperformed investment-grade bonds even as stocks outperformed Treasuries? This violation of my maxim, "Stocks float on a sea of bonds," accelerated after the Federal Reserve's mid-August action and negated an early-August call for a narrowing of corporate credit spreads (not that I take such things personally).

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Howard L. Simons is president of Simons Research, a strategist for Bianco Research, a trading consultant and the author of The Dynamic Option Selection System. Under no circumstances does the information in this column represent a recommendation to buy or sell securities. While Simons cannot provide investment advice or recommendations, he appreciates your feedback; click here to send him an email.

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