View from the Observation Deck

1. Today's blog post is seeking to expose investment opportunities that bridge stocks and bonds. In other words, share characteristics of both.
2. High yield corporate bonds and convertible securities are two that come to mind. Both can generate a high level of current income, yet both are cyclical in nature, like equities.
3. Mutual fund flows clearly show that retail investors have maintained a strong bias towards income-generating securities (bonds and dividend-paying stocks) in recent years.
4. Taking into consideration that the Federal Reserve recently announced a third round of quantitative easing , we believe that investors should at least have these two investment options on their radar screens.
5. It is quite conceivable that the trillions of dollars of stimulus already pumped into the U.S. economy could at some point accelerate economic activity and drive the U.S. GDP growth rate higher.
6. That is what transpired from 2001-2003. Once the GDP growth rate grew more robust, the Fed tightened monetary policy from 6/04-6/06 (see chart). Performance returns for these asset classes, however, remained in positive territory.
7. High yield corporate bonds and convertible securities typically do not outperform stocks during periods of strong performance, but they can participate.
8. Year-to-date through October, the S&P 500 posted a total return of 14.29%, while the ML U.S. High Yield Master II Index and ML All U.S. Convertibles Index returned 12.90% and 11.60%, respectively.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The following are unmanaged indices: S&P 500 is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance; Merrill Lynch (ML) U.S. High Yield Master II Index represents high yield bond markets as a whole; and Merrill Lynch (ML) All U.S. Convertibles Index represents convertible securities spanning all corporate sectors.