QUESTION: Dear Mr. Armstrong
As a long time reader I rarely see you mention the possible long term benefits of also holding corporate bonds. I understand the obvious down side to government bonds and the reason for stocks to move higher, but since bond holders get paid before stock holders when things go bad would corporate bonds not be a lower risk investment.
Thanks for sharing your work.
ANSWER: Corporate bonds of blue-chip companies will eventually move to a premium over government. We can easily see that when government was the place to run, the premium shifted to governments and then declined after 1932. If you are looking at high grade corporate bonds, towards the end of this bull market in shares, you would shift to corporate bonds – not government.
We can see historically, no relationship is ever solid or fixed. You can see that 90-day commercial paper was at a huge premium during the 1840s when banks were collapsing during the State Sovereign Debt Defaults. Then during 1930s you see 90-day commercial paper drop below government. This particular cycle you want to avoid municipal, state, and federal debt issues.