Montreal, Canada

According to The Wall Street Journal and a recent report by Credit Suisse, U.S. non-financial free cash-flow sits at 2.8% of gross domestic product (GDP) – near a 40-year high. That makes the largest non-financial companies in the United States among the most attractively-valued in a defensive environment for conservative investors who remain reluctant to join the post-March 2009 rally.

Many value-oriented money-managers are drawn to stocks trading at attractive cash-flow multiples. Companies that harbor free cash can boost dividends, grow acquisitions or maintain dry powder in an economic recession to fund future growth.

Investors are bidding on non-financial corporate bonds, too.

In some countries in Europe, corporate bond spreads have narrowed considerably against government bonds and, in some cases, command a premium.

High quality corporate debt from the likes of Unilever plc provides a smaller effective yield compared to British gilts, or government bonds. The British government is struggling to grow the economy, mired under a mountain of bank losses and deflation in domestic consumption, real wages and housing. Over the last 12 months many investors have preferred to own blue-chip corporate bonds instead of gilts.

In the United States the spread between investment grade corporate bonds and benchmark Treasury bonds is just 37 basis points, or 0.37%. Though that spread is around historical levels it might be poised to narrow as the federal government continues to borrow heavily; recently, Treasury has struggled to raise funds amid a flood of issuance to finance the country's bulging deficits.

Alternatively, high grade U.S. corporate bonds generally harbor healthy balance sheets, low debt levels and don't have problems securing financing. Over the last 12 months the Dow Jones Corporate Bond Index has gained more than 21%.

With interest rates poised to rise from historically low levels and bond fund inflows approaching a peak it might be a good idea to buy a basket of large-cap consumer staple stocks. That's what I've done recently. The prospects for most bonds don't look particularly compelling as market rates head higher later in 2010-2011 coupled by the possibility that if bonds continue to struggle, investors might start dumping their bond funds.

The Consumer Staples Select SPDRs (NYSEArca: XLP) provides investors with a broad basket of blue-chip stocks that have historically outpaced the S&P 500 Index and with less risk.

Since June 1998 XLP has turned an initial $10,000 investment into $13,136 compared to $12,516 for the S&P 500 Index. XLP charges just 0.21% per annum and holds 42 companies, including Procter & Gamble, Wal-Mart Stores, Philip Morris International, Coca-Cola and CVS Caremark. XLP currently yields an effective 2.59% compared to 1.8% for the S&P 500 Index.

To be sure, most of these stocks trade near their 52-week highs and have surged along with the broader market since March 2009. But in an environment of growing sovereign debt woes and massive debt accumulation by the world's Western economies, we might be at the cusp of a major asset allocation shift whereby investors move out of bonds and buy high quality large-cap stocks. It's hard to make a case for bonds at these levels as rates have only one way to go.

I'd rather own Coca-Cola paying a 3.2% dividend yield than Treasury bonds yielding 3.76% and likely to struggle over the next several years as America's creditors eventually demand a higher interest rate premium to finance bloated deficits. Coke, by the way, trades more than 35% below its all-time high in April 1998 and should continue to grow its business and dividend over the next few years. Treasury bonds, however, don't offer any of these prospects.

Finally, I'm disclosing that I personally own shares of Coca-Cola and XLP.