By Walden Siew - Analysis
NEW YORK (Reuters) - As other markets suffer, the January effect is alive for U.S. corporate bonds.
The so-called January effect describes the broad trend in which stocks tend to climb at the start of the year because investors cash out on losing bets and risky positions in December to minimize risk or claim capital losses for tax purposes.
In 37 years since 1950, or more than 60 percent of the time, the Standard & Poor's 500 index rose in the first month of the year.
As applied to the corporate bond market, the trend for strong January performance plays out for similar reasons, and new bond sales tend to rise as corporations seek to get a jump start on their capital raising plans.
In the midst of a global credit crisis, that phenomenon isn't happening for stocks in 2009. But investors continue to put their money to work in corporate debt.
"The January effect could play out over six months or maybe the whole year," said Cynthia Cole, a portfolio manager at Allegiant Asset Management, where she helps oversee about $15 billion in fixed income assets.
"Whether we're seeing a January effect or not, this is a good period to be invested in corporate bonds," Cole said.
The Standard & Poor's 500 index is down about 6 percent so far this year, while the Dow has shed about 7 percent, and the Nasdaq has declined nearly 4 percent. Meanwhile, U.S. corporate bonds are on track for 1 percent returns so far in January.
Major fund managers, such as Fifth Third Asset Management, also are shifting assets from stocks to corporate debt in their search for yield.
A Reuters poll of 12 major fund managers in the U.S. interviewed between January 15-28 showed that money managers held an average of 60.6 percent of assets in equities, down from 61.9 percent a month earlier.
The group held 32.7 percent of their assets in bonds, specifically investment-grade debt, in January -- up from 29.6 percent in December.
"In January we went into the year with strong expectations that we could get outsized, double-digit returns from spread product through investment-grade corporate bonds," said Keith Wirtz, president and chief investment officer of Fifth Third Asset Management, which manages $22 billion.
U.S. equities look vulnerable given that economic conditions appear to be deteriorating even further, which consequently means dividends could be cut by corporations preserving cash, Wirtz said.
Meanwhile, corporate debt has enjoyed an eight-week rally as investors shifted out of stocks for high-yielding corporate debt.
U.S. corporate bond spreads are at their tightest levels in months, with high-yield spreads narrowing to 1,640 basis points on Wednesday, the tightest since November 11. Investment-grade bond spreads narrowed to 540 basis points, the tightest levels since October 9, Merrill Lynch & Co data showed.
"Treasuries is the most overpriced asset in the market and corporate bonds -- which priced for massive depression -- is the most attractive even over stocks," Fifth Third's Wirtz said.
Investors should heed a second definition of the January effect: "As January goes, so goes the year."
That phenomenon has a remarkable track record for bear markets. In every down January in the stock market since 1950, a decline in January was followed by a bear market or a flat year.
For both stocks and bonds, investors will have to wait until December to see if the same holds true in 2009.
(Additional reporting by Jennifer Ablan, Editing by Chizu Nomiyama)
