At separate press briefings in New York recently, Thornburg Investments and MFS Investment Management expressed bullishness on both the current corporate bond and municipal bond markets.

"There is no reason to step into any market and buy low-quality assets today," said Mike Roberge, CIO of U.S. investments at MFS Investment Management. "You can buy high-quality assets at compelling valuations, so there's no reason to take excessive risk. We are in a capital protection market, not one where you want to try to capture significant upside."

Default Risk
Jason Brady, director of fixed income at Thornburg Investments and portfolio manager of the $2.5 billion Thornburg Investment Income Builder Fund (TIBAX), echoed those sentiments. He believes that the worry about more defaults in the corporate bond sector has been overblown. "Currently, investment-grade bonds are priced for a scenario where 50% will be in default over the next 10 years," Brady said. "Obviously, I don't foresee that coming about. The largest percentage we've seen over a 10-year period since 1980 is 5%."

The average corporate bond rating in the Thornburg Investment Income Builder Fund is BBB+. Brady and the other managers favor the steady cash flows of businesses in the utility, cable and telecom sectors. The fund's negative 34.65% return last year reflect recent changes in the fund. "We increased the fixed-income holdings from 15% to 38% within the past year, and most of that was done in the last three months," he notes.

Although not bullish on either the fundamentals or technical aspects of the current corporate bond market, Andrew O'Brien, portfolio manager of the Lord Abbett Income Fund (LAGVX), says, "What's being priced in is a much worse scenario than we're expecting, and unlike with securities that don't produce income, with corporate bonds you get paid to own and wait for things to get better. So it's a good time to be involved." About 70% of the fund's assets are allocated to corporate bonds.

Furthermore, says O'Brien, "You're getting paid to take the risk, and it's a good time to have an active manager working with you, somebody who can sort through and find the babies that are getting thrown out with the bathwater and avoid the credits that people ought to be avoiding." The fund was down 10.17% last year.

Perhaps another fund worth looking at is the CNI Charter Corporate Bond Fund (CCBAX), managed by City National Asset Management, the investment management group at City National Bank in Los Angeles that manages or administers nearly $53 billion in assets.

Currently, the CNI bond fund has all its assets invested in high-credit-quality notes, bonds and debentures. Recently, it added some Federal Deposit Insurance Corp.-insured bonds, according to Rodney J. Olea, the director of fixed income at City National Asset Management who co-manages the fund with William C. Miller Jr. The managers are also positioning the fund to add some industrial bond issues over the next few months. Among the fund's largest current holdings are Wells Fargo, Toyota Motor Credit and GE Corporate Credit.

The Class N shares of the fund were up 1.40% last year. Since inception in 2000 through the end of last November, the City National fund's N shares posted a total annualized return of 4.51%. (Class N shares are typically shares available to the public that do not charge a sales load. The exact definition and applicable fee differentials between share classes will vary from fund family to fund family.)

An alternative way to access the corporate bond market is through low-cost exchange-traded funds, which offer increased liquidity and transparency. Barclays Global Investors says its iShares iBoxx  Investment Grade Corporate Bond Fund (LQD) has experienced tremendous volume boosts, as has its ETF focused on the Barclays Capital U.S. Aggregate Index. "We've seen trading volumes in the LQD quadruple since last June, while assets have grown by more than 40% over that same time period, to $5.5 billion," says Matt Tucker, head of investment strategy at BGI. According to Morningstar, the iBoxx fund offers good exposure to investment-grade bonds, but it is fairly concentrated in certain industry areas, and if these industries stumble, it can hurt returns.