My friends working in stocks are getting more and more depressed. They do not expect high bonuses any longer, while my other friends in fixed income just smile. I remember some quarters ago, when stocks was the hottest issue, both in spot and derivatives. Do you think that now is the moment to be in fixed income?

Without a doubt. And will be for a long time to come

No...now is the time to be in derivatives...of all kinds P

QuoteDo you think that now is the moment to be in fixed income?What is the case for bonds versus stocks? Or, more broadly, what is the next hot asset class?

Well with US going into deficit they will at least need to increase issuing of bonds. Also for corporations it is harder to raise capital from issuing equity, instead one would expect more bonds. More bonds also implies more demand for fixed income derivatives.The fixed income market will be Hot! but derivatives in general should be hot now that you no longer simply can buy .com stocks and cash in profit, the equity option business is popular these days.

Convertible bonds is the wave of the future.

>Convertible bonds is the wave of the futureI agree it is a wave. More and more people have been riding on it, the question is if we are at the top of the CB wave?

Perhaps it will freeze in place and we can ski away to our heart's content!Seriously though, I think hybrid instruments like warrants, contingent value rights, CBs, and resurrected forms of preferred equity will be the ways corporations increasingly form their capital structure. Options folks are slicing off too much cheese from the perspective of corporate CFOs, and they want some of the action. I think a firm that effectively floats itself as a "collar" with both warrants and contingent value rights is not far off. But then again I had a long lunch with lots of wine....and the market is quiet, and you just muse away at possibilities....

There can't possibly be any juice left in the CB arb business...can there???P

Split the equity-linked world in two and consider what you've got:1. CBs: Something like 80% of European CBs are issued to finance acquisitions. The M&A business is deader than a very dead doornail. In Asia CBs have typically used for financing large investments (like fabs, for chip manufacturers, think TSMC), but the whole tech/telecom sector is suffering from over-investment. So we're unlikely to see much CB supply from these sources.2. Exchangeables: Are an instrument for divestment (i.e. selling shareholdings), but ... guess what? An exchangeable is a share plus a put ... I don't know many CFOs that want to give money back guarantees in this market! I believe that the huge increase in equity-linked issuance that we've seen over the last few years is just a cyclical phenomenon, the same as at the end of the 1980's.Many companies are in the position of having to restore balance sheet strength. This ranges from financials needing to raise regulatory capital (think of Legal and General and Aegon both announcing equity issues in the last couple of days) to telecoms/techs needing to decrease leverage. (Think of Versatel, NTL, Telewest all restructuring debt and people talking about France Telecom doing a $10bn equity issue! Woah!)Despite the tattered state of the equity market, I think we're much more likely to see a pick up in equity issuance before we see a flood of CBs. Again, this is typical of the issuance cycle.But on the wider question of fixed income vs equities ... I still think there's a long long way to go in credit before all the games are exhausted.

QuoteThere can't possibly be any juice left in the CB arb business...can there???When you get my cv in the mail asking if you need help sweeping up at night or running off photocopies, then you'll have your answer!As far as the future markets goes....today Johnny's crystal ball looks much less cloudy than mine. Q: "What's the definition of a "10"?"A: "A "4" after six beers.""Many companies are in the position of having to restore balance sheet strength." The question for me is, how are they going to do this? With simple, clear, easy to understand vanilla equity and debt with super-accurate-and-honest-reporting-we-promise-Mr-SEC-and-Mr.-Moody's-and-Mr.&Mrs.-Shareholder! Or with more competant bait and switch magic tricks OBS like those runners and players in London, Greenwich and the pits in Chicago have fun with? Have we emerged from Plato's cave where we see the entire world as contingent claims and should say so? To investors as well as regulators? Or do we really still want to "restore balance sheet strength" by returning to "transparency" that really is a legislative mandate for suposed "simplicity" and a myth of ownership and indebtedness that can't be isolated any longer from the contingent claim world?I wish I knew. So the answer to the question "fixed income hotter than stocks?" is: blackjack. There are more and more casinos opening all the time. All of them can't have three deck shoes and have spotters for card counters.

To avoid any misunderstanding, by "strengthening the balance sheet" I mean "reducing leverage". I don't mean to imply anything whatsoever about reporting standards, contingent claims or Plato.Apologies for any misunderstanding.

Corporate CFOs : "We loooooove going waaaaayyyyy up that capital market line!"Leverage is strength to those who subscribe to "whatever does not kill me makes me richer" theory.