The emphasis this year must be on return of capital

Corporate bonds posted a strong performance in 2009 (c. 15%), more than recovering the losses of 2008, and have dramatically outperformed equities over the last decade.

Yields on A-rated five year maturity paper are around 4.5%. The yield premium available over equivalent maturity government bonds has fallen dramatically since the start of last year. Government strategy of recapitalising banks, guaranteeing debts and insuring assets has effected a dramatic turnaround in the performance of risky assets, including equities and low grade corporate debt. With government effectively giving an open ended guarantee to the banking system, private sector financial credit risk has to a significant extent been transferred to the sovereign. Optimistic talk of dr...