Bizarrely it's debt, of the corporate kind, that's attracting investors

THERE'S something about the four-letter word that still manages to fan public outrage despite centuries of linguistic evolution.

Even mentioning the term "four-letter word" sends vast numbers of Australians into a lather.

There's no accounting for public taste. But as far as investors go, only one word is considered off limits and that is the D-word. That's D for debt. D-E-B-T.

As far as dirty words go, debt ranks right up there, or right down there depending on your point of view, with the worst of them.

In the past couple of years, we've witnessed the implosion of some of our former national heroes, those bullmarket devotees of debt. Eddy Groves watched his ABC Learning unravel at a rate of knots, David Coe couldn't prevent the collapse of Allco Finance while Babcock and Brown's founder Phil found it wasn't so easy being Green as the company torched $10 billion of other people's cash.

But in a perverse reversal of logic as the financial storm sparked by the European and American debt crisis threatens to engulf the developed world many of the most sophisticated traders have sought out debt as a safe haven.

One reason stockmarkets globally are sinking apart from the prospect of a global recession is that the big money is shifting out of stocks and into debt primarily US government bonds but also other forms of debt such as corporate bonds, something local investors shy right away from.

When it comes to financial markets, Australians think only of stocks. A punt on the market usually entails a plunge either into a particular company, a sharemarket sector or slapping cash into an indexed fund that spreads your money over the top 200 companies via a computer program.

But the debt markets? The accepted view is that they are way too complicated and there's a certain truth to that. Even market savvy stockbrokers shy away from debt markets. They don't trust them and they don't trust those who work in them. It's calculators and butter knives at 20 paces.

This may come as a shock, but debt markets rule the world. It was debt traders who created the American real estate explosion that morphed into the sub-prime debt crisis. And it was debt markets that first realised there was a crisis a good six months before Wall Street stock traders cottoned on back in mid 2007. Wall Street couldn't even keep pace with the lemmings.

Now, international debt markets once again are calling the shots. They are demanding that bankrupt European nations such as Greece, Italy, Spain and Portugal come clean, even if that means sending some of Europe's biggest banks broke.

So where on earth could there be any opportunity amid all this gloom? Should you simply put all your remaining cash under your pillow?

In a bizarre twist, as the latest episode of the financial crisis has gripped market psyche, central banks and some of the world's biggest investors have begun shifting trillions of dollars out of what they reckon may become dodgy investments and into US government treasuries short dated debt.

Given America was one of the fundamental causes of the crisis and that its central bank is running short of options to kick-start the economy, it seems a strange thing to do. The main reason they cite for this odd behaviour is the liquidity in US bond market trading. If they need to get out in a hurry, they can.

The returns are pretty ordinary, especially after President Barack Obama's "Twist and Shout" initiative on Wednesday, which aims to drive long-term interest rates well below 2 per cent hardly what you'd call a handsome return.

This is the kind of environment where debt traders come into their own, the kind of situation that gets them all excited.

Australian banks and many of our biggest companies have been raising debt on local credit markets in the past three years at very attractive rates. And unlike shares, investors have a much higher level of confidence they will be repaid once the debt matures.

Our banks have been big borrowers in recent years. Most bond market traders reckon if you stick your hand up, a bank will shove a bond into it. Our big four banks, in particular, are keen to reduce their borrowing from offshore wholesale markets after getting caught in the financial storm three years ago and have lifted their domestic borrowing.

But many of our big companies, wary of borrowing from the banks, also have batted up corporate bonds in an effort to raise cash. Many of these are offering terrific yields with a guarantee of getting you money back in full at the end of the term. That's something that is not available on the stockmarket.

It's an area that many of our big superannuation funds have been pursuing. Not only is it safer than shares, the returns are good. If you're wondering how that could be, given the sharemarket reckons everything is turning to the S-word, you wouldn't be alone.

Partly it is because major corporations faced up to what Western governments now are unwilling to confront.

They bit the bullet three years ago, paid down their debts, took the hit to their balance sheets and put their finances in order.

According to big fund managers such as local outfit Perpetual, Australian corporate debt may well be the new haven for investors. They reckon returns far outweigh risks because investors, so scared of debt after the meltdown three years ago, inadvertently have created an investment opportunity.

It just goes to show. Even in a downturn, there's always someone looking for a way to earn a buck.