Offering safe haven

NEW YORK – The stumble in stocks that began in the second half of 2007 and continued into 2008 has sent many investors looking to the safety of high-quality bonds – and with good reason. Returns from government bonds outstripped those from the Standard & Poor’s 500 stock market index last year. That’s unwelcome news for investors because many mutual funds either mirror the moves of the S&P or are measured against it.

A weak showing by many stocks and fears of an economic slowdown led investors to pump an estimated $140 billion into bond funds in 2007; they added $80 billion 2006. The figures, from fund tracker Strategic Insight, include investments such as exchange-traded funds, which group baskets of investments under one security, and include estimates for December.

While the burst of strength in the bond market amid the turmoil in stocks clearly doesn’t mean investors should jettison their stock holdings, it could be time for some investors to wade deeper into bonds. At the very least, market watchers say, investors should consider whether their portfolios are well-balanced.

“People may not know what their risk tolerance really is until you get into a bad period,” said Aaron Gurwitz, co-head of portfolio strategy at Lehman Brothers Investment Management. The stock market’s recent turmoil has no doubt attracted many investors’ attention.

“It’s saying that the economy has gotten into trouble,” he said of the stock market. “We don’t know how deep the trouble will be.”

Much of the cloudiness that surrounds economic forecasts comes from uncertainty about the troubled housing market and a related tightness in the credit markets. Faltering mortgages have made banks hesitant to hand out money for fear that exotic investments made up of bundled home loans could sour and hurt the value of collateral.

So while the fear of a weakening economy has led many investors to rush for the safety of government-backed Treasury bills, some observers say investors have perhaps been too hasty in abandoning other corners of the market.

“Even corporate and municipal bonds were shunned in this environment given some of the fears out there,” said Andy Richman, fixed-income strategist at SunTrust Bank’s personal asset management arm.

“We are looking at some high-grade corporate debt that has been beaten up,” he said. “It has been an extreme flight to quality that could be perhaps overextended,” he said, referring to a recent distaste among some investors for all but the safest bonds. High-quality corporate debt is generally considered safe, though not as much as Treasury notes.

Richman is considering investing in corporate debt because he thinks the recent show of force among government bonds isn’t likely to repeat.

“There was a tremendous rally in the second half of the year in government bonds but I don’t think I’d expect to happen this year again,” said Richman. “But can Treasurys outperform equities? Yes.”