Since November I've been allocating fresh funds into distressed investment-grade corporate bonds in the United States. Along with gold and TIPs (Treasury Inflation Protected Securities) that's about all I've been buying over the last three months.

In Europe, the investment-grade corporate bond market has not bottomed. The European economic cycle in many ways is deeper entrenched in this crisis that the United States with bond yields remaining under pressure. The U.S. debt market offers a better risk-adjusted return. 

In the United States, investment-grade corporate debt has corrected about 5% over the last two weeks (excluding interest income) offering new investors a good entry point. The Dow Jones Corporate Bond Index now yields 6.6% while the Barclays U.S. Corporate Bond Index yields 7.3%. Both indexes offer rich spreads of 4.1% and 4.8%, respectively, over benchmark 10-year Treasury bonds. The last time spreads were this wide was back in the 1930s.

Investment-grade corporate bonds surged 16% in December after crashing in September and October, triggered by Lehman's collapse and the nadir of the global panic on October 9. Credit spreads have since narrowed significantly but remain historically elevated in what is still a credit crisis. Yet unlike other segments of riskier credits, like high-yield or leveraged loans, the corporate investment-grade area is raising fresh capital since December while the largest bank-issued bonds are backstopped by Uncle Sam.

A growing concern this month is the solvency of America's largest financial institutions. Though it's fair to argue that most of these banks are insolvent and shareholders will eventually get wiped-out under a government nationalization plan, it's a different story for bondholders.

Most investment-grade corporate bond indexes hold about 30-40% of their total assets in financial sector bonds. These typically include Citigroup (likely to fail), Bank of America, Wells Fargo, JP Morgan Chase and Berkshire Hathaway. These bonds won't default; even debt issued by Citigroup is highly likely to be honored by the federal government. In most bankruptcies, shareholders are destroyed but bondholders are paid. That was the case with Bear Stearns, for example.

I'm still buying the best quality credits I can find, namely in investment-grade bonds, TIPs and even nibbling at junk bonds. The latter will witness a major spike in default rates this year as the economy continues to deteriorate. Yet with yields of about 16% on high-yield debt, even if half of the issuers default, I'm still getting about 9% on my money -- a pretty good speculation. Again, junk bonds should be purchased at these bombed-out levels but with a view that defaults will rise in 2009 and that it's highly likely you'll be building this position again later in the default cycle.

Overall, stick to high quality investment-grade corporate bonds. As the stock market eventually heals one day it will be preceded by a rally in non-Treasury debt securities. This is a credit crisis afterall and I expect riskier bonds to lead us out of this mess.

The way I see it, why should I load-up on risky stocks that will suffer a blizzard of dividend cuts this year when I can buy quality fixed-income securities that yield 6% or more plus the scope for big capital gains? The heck with stocks. I'm more comfortable getting paid to wait and sitting on bonds like IBM, JP Morgan Chase, Berkshire Hathaway, Johnson & Johnson and Wal-Mart to name only a few.

This week, I assumed the role of editor for The Sovereign Society's Accelerated Income weekly VIP. Whether you're conservative or aggressive there's a host of great opportunities now in fixed-income markets. With credit spreads still pretty wide it should be an exciting year for this service in an otherwise dismal global marketplace.