Looking for a stellar investment opportunity?

A leading financial analyst says corporate bonds could be a shrewd investment in the current recession hit economy.

Legal & General Investment Management’s credit strategist, Ben Bennett examined the corporate bond market for the firm’s Fundamentals briefing last month, explaining the key risks and identifying the potentially stellar opportunities that they may hold for investors.

“The investment grade corporate bond index currently yields 5 per cent more than government bonds,” said Mr Bennett. “History suggests that this is an extraordinary level of compensation for the level of potential annual losses from companies defaulting.”

Mr Bennett also acknowledged that investors face risks in the near-term, saying that in an environment where economic growth is slowing and corporate profits shrinking, credit deterioration appears inevitable.

However, he explained that there is considerable dispersion within the marketplace, with those companies less tied to the economic cycle significantly outperforming ‘cyclical’ corporate bonds.

“Cheap bonds are cheap for a reason, with the coming months set to witness a high number of downgrades and associated volatile price action,” he said.

Mr Bennett concluded that despite significant ‘fallen angel’ -- bonds that are downgraded from investment grade to speculative grade -- risk remaining, the corporate bond market as a whole is currently providing a long-term investment opportunity not seen since the 1930s.

In addition, he pointed out that by avoiding fallen angels while benefiting from the high yield which is associated with this risk, an active approach may offer even greater opportunity.