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Why corporate bonds will outperform common stock over the next several years



March 13, 2009 – Comments (0)

"The income statement is the past, but the balance sheet is the future."

Rolfe Winkler of the depressingly named site Option ARMageddon posted this fantastic chart and quote today.  I strongly believe that even when the markets do eventually find a bottom, we are going to sit there for a long time as the U.S. government and consumers work off the massive load of debt that they've rung up over the past two decades.

This is why I invest in bonds.  They are higher up the capital structure than common stock.  On average, owners of senior bonds have historically gotten 40% of their money back in the event of a bankruptcy.  While this recovery rate certainly will fall in the event of a significant recession and a deflationary environment, bonds are still a whole heck of a lot safer than common stock.

I'll gladly take the solid yields and higher degree of safety that short- to medium-term corporate bonds offer over the promise of capital gains that may never materialize in what will likely be a low to slow growth environment where people are paying down their debt, rebuilding their destroyed net worth, and Baby Boomers have passed their peak spending period over the next several years.

That's the bad news.  The good news is that it's Friday at 5:00.  Time to crack open a beer and enjoy the weekend!  See you all Monday.


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