Ready for a dirty investment word?


Duck if you say that to any long-term holder -- and for good reason. The supposedly safe and secure bond -- the best bet around for the widows-and-orphans fraternity, so we've been led to believe -- has been a disaster for the past year and a half. Though exact figures are hard to come by, estimates put losses in bond values at more than a trillion dollars in the wake of those rocketing interest rates.

Buy hey, out of chaos comes opportunity, and some of Wall Street's most sophisticated investors are starting to peck away at the bond market. Several think it could be one of the top-performing investments of early '81.

The reason: potentially fat returns of 30 percent to 35 percent over the next six months (a combination of coupon interest and capital appreciation).

The assumption here -- and it's a big one -- is that interest rates are at or near their peak and will drop some 200 to 250 basis points (or 2 to 2 1/2 percent) over the next six months.

As one of the Street's top bond minds put it, "If you believe the economy is slowing, if you believe Reagan can temper inflation and hold down government spending, and if you also believe that the Federal Reserve will contain credit growth, then the bond market is the place to be. . . ."

Recent bond action indicates there are at least some believers. For example, a 12 3/4 percent-yielding Treasury bond, maturing in 2010, was selling at $986.25 two weeks ago. At press time, it was up to $1,071.90 -- a fast gain of nearly 9 percent. And a new issue of Southwest Bell Telephone -- with a 14 1/4 percent yield and maturing in 2020 -- was around $950 a couple weeks back. Today, it's $1,030, up almost 8 1/2 percent.

The prospects of hefty bond gains are also being talked about by a growing number of the investment advisory services.

"Who said bonds have to be dull?" asks the Investment Strategist in its latest issue.

Citing increasing evidence of a slowing business environment, notably in the housing and auto sectors, the Jersey City, N.J.-based advisory service says it's only a matter of time before the reverberations are felt throughout the entire economy.

The theory here is that slowing business will lessen corporate demand for funds and that, in turn, will pave the way for lower interest rates.

The Investment Strategist, in arguing its case, also points to the recent break in commodity prices -- one of the most reliable lead indicators of interest rate peaks.

The service hastens to point out that everything is by no means rosy. Loan demand is still increasing (though this is thought to be chiefly distressed borrowing that will reverse itself in due course), money supply growth is still not firmly under control and government expenditures are continuing to run at much too fast a clip.

But, observes I.S., "It's our feeling that these factors have been more than built into the current interest rate structure . . . and bottoms in markets are not made against a background of cheerful news."

The service has three favorites -- all triple-A quality bonds -- that it believes have the potential to show at least a 30 percent gain over the next six to 12 months (or in excess of 50 percent via the typical 30 percent margin requirement).

The trio (along with current yeilds and maturity dates): Citicorp -- 15.04 percent, 2004; Gulf Oil -- 14.29 percent, 2009, and IBM -- 12.58 percent, 2004.

"Another historic bond-buying opportunity" is the way another investment adviser views the fixed-income sector.

The previous one, says Smart Money (of Old Tappan, N.J.), was in March. And a couple of months later, many bonds had risen more than 25 percent, as investors also locked in fat yields.

Here again, the view is expressed that the high rates will abort the economic recovery and precipitate a second recessionary slump. Moreover, smart money expects Reagan to hold to a tough line on inflation, implying a gradual recovery at best.

Among its bond favorites: Treasury bonds and notes (maturing in 10 years or less) and such corporates as American Telephone & Telegraph (10 3/8 percent, 1990); Bell Telephone of Pennsylvania (8 3/4 percent, 2015); General Motors Acceptance (8.2 percent, 1988); IBM (9 1/2 percent, 1986); Merck (7 7/8 percent, 1985); Sun Oil (8 1/2 percent, 2000), and Twentieth Century-Fox (10 1/4 percent, 1998).

Morgan Stanley's research chief Barton Biggs is also plugging bonds, though he warns of the potentially high amount of corporate financing that is likely to occur when rates fall. The reason: the anxiety of corporations to restore their liquidity. And this, says Biggs, could put a temporary lid on the bond advance at some point -- though he doesn't think it will inhibit the initial move.

Though one can't help but be tempted by the near-term prospects of big bond gains, it should be clearly understood that risks prevail. There's the emergence of heavy bond volatility (with the prospects of up-and-down moves of as much as 5 percent in a single day). And there's the real possibility that rates could go even higher (which would mean instant losses).

But the crux of it, as Biggs explains, is that picking market bottoms is always perilous.

A scholarly type, he relates the current bond environment to a passage out of Dickens' "Bleak House." In that story, Esther Summerson, on her way to a new life in London, says: "I was persuaded when I was 10 miles away that I was there; and when I was really there that I would never get there."

Concludes Biggs: "I think we are in London, at last."