Fortune favours the bold, wrote Virgil. But his Trojan Aeneis, mythical founder of Rome, obviously never invested in credit-spread products.

Global fixed-income fund managers say they are not yet ready to take big positions despite the tantalising opportunities that the current bout of volatility is creating.

ôStunning value is being created,ö says Kevin Colglazier, London-based CIO at Standard Bank, which specialises in high yield and emerging-market debt, areas where spreads have ballooned. ôIf you liked emerging-market or high-yield issuers before at really tight spreads, you should like them even more now. But volatility makes it foolhardy to wade in fully at this point.ö

Wider spreads are good in the long run because investors will finally get paid for taking risk, after four years in which good and bad quality alike returned only slightly different yields, notes John Graham, partner at Rogge Global Partners in London, a bond boutique.

But heÆs holding off on any purchases, because of uncertainty: ôNo one knows where subrime is in CDOs, in CLOs, in CPPI notes. WhoÆs holding this paper? Can the big private-equity deals get done? Because of leverage, if a position is unwound, it could be big.ö

APS Komaba, a boutique bond house in Singapore, is also hesitating. Lim Heong-Chye, managing director, says he likes the yen, which is now appreciating against most other currencies as the carry trade loses steam. But, he admits, ôI donÆt have the guts to go very long the yen right now.ö He fears the currency markets are likely to suffer more volatility.

For years, bond fund managers have lamented the lack of volatility, the compression of spreads and the fear of leveraged buyouts turning good credits into junk. They have not been able to generate returns in the markets without going down the credit curve and employing leverage. The huge expansion of the credit derivatives market attests to this trend û credit-default swaps were used to hedge away increasing risks taken on by investors.

Those bond managers with exposure to credit are now suffering as spreads blow out, while those who have remained conservative and largely exposed to sovereign bonds or triple-A rated corporate bonds are unaffected. As with any crisis, managers can exploit the situation if they have two things: cash, and stability. If they lack liquidity, or if they have to use their cash to meet redemption calls, then theyÆre stuck.

The LBO threat is now gone so industrial borrowers look safer. But leverage is now the bugbear. Aside from the bottom end of US mortgages, the bond markets donÆt have credit problems; they have liquidity problems. But if the traffic jam created by investors fleeing riskier assets and unwinding the carry trade does end up damaging the economy, it could then actually lead to credit defaults.

Optimists donÆt think this is likely. Colglazier, for example, notes that strong macroeconomic fundamentals mean markets can weather this storm. Unlike the Asian financial crisis of 1997-98, when massive overinvestment led to unfinished skyscrapers in Bangkok that had to be torn down, this current bout is more about liquidity and confidence û problems that central banks are in a position to tackle.

He notes that higher quality sectors of the bond markets have gone largely unaffected. Last week, for example, saw over $15 billion of new issuance in the US among single- and double-A rated issuers. ôAnd the emerging market world is doing well; if it were having problems, oil wouldnÆt still be at $70/barrel,ö he notes.

Other managers are less confident. Graham thinks a continuing trail of bad news along the lines of the announcement earlier this week that Wal-Mart sales are down will bleed into the real economy. And while emerging-market fundamentals are good, that hasnÆt stopped the sector from suffering.

This is simply because of contagion. High yield managers, desperate to hedge their positions despite liquidityÆs vanishing act, have used securities such as Argentine or Brazilian debt as proxies. So spreads in emerging markets have suffered. As the worst-hit segments of the bond markets see spreads widen, those securities further up the credit curve start to look expensive by comparison. So they too experience spread widening, even if the underlying borrowers are hale and hearty.

For Graham, the biggest unknown is that a major financial institution turns out to have a big enough exposure to subprime or other under-performing assets and goes under or has to be bailed out. The fear of lending to such an institution û and being left holding the bag û is why credit has evaporated, forcing monetary authorities such as the European Central Bank to step in with big liquidity placements.

APS KomabaÆs Lim says he is watching Japan to figure out which way the wind will blow. ôJapan is the worldÆs biggest creditor,ö he explains. ôJapanese individuals and corporations have driven the carry trade. Lately $10 billion every month was leaving Japan to invest in things like subprime, high yield and mortgage-backed securities.ö

Is this money going to flee back to yen? Will it find other homes in US dollar assets? How much of an impact on FX volatility will the Japanese create? ôThey will decide how things play out,ö Lim says.