The investment landscape for global fixed income, particularly in American and Europe, has changed so dramatically that some bond managers will realize great returns, provided they are able to take advantage of what they see.

ôThis is the best investment environment IÆve seen in 20 years,ö says Emanuele Ravano, managing director at Pimco in London.

The liquidity crisis in money markets has led to volatility that has driven up the price of many government bonds, particularly German bunds. ôItÆs like the early days of the euro,ö Ravano says.

Beyond the day-to-day movement of bond markets, however, is a bigger shift. The Bank of EnglandÆs decision to back all deposits in British building society Northern Rock has changed the terms of the game. Ravano says this effectively has given all European banks a de-facto government guarantee.

ôBecause there is no defined financial rescue system in Europe, the only philosophy becomes ætoo big to failÆ. This will encourage mis-pricing and the mismanagement of risk,ö he predicts. ôThe implications of this crisis have not been bourn out.ö

As a result of the seizure in money markets, traditional roles have been upended, and fund managers with enough scale, cash and willingness are æunderwritingÆ their own deals, at preferable terms.

Pimco, for example, has recently invested in the leveraged loan for Chrysler at terms driven by its own credit team rather than the investment banks. This is because investment banks are keen to reduce the size of their inflated balance sheets almost at any cost. Yet for investors, steeper yield curves and widened spreads have slashed prices, even in sectors like banking where they now expect an unofficial government guarantee. They can achieve low-risk returns akin to what would have required huge leverage just six months ago.

It requires an appetite for risk and cash at hand to take advantage of this situation, however. Pimco has been able to provide liquidity and has stepped in by æunderwritingÆ deals for corporations, in order to maximise both the yield and the protection linked to tighter covenants.

ôThe buy side/sell side relationship has changed dramatically,ö Ravano says, adding that investors should take greater risk now. ôThere are so many dislocations in the market now, that a bond manager can exploit this for the next 12 to 18 months.ö

He believes inflation-linked bonds, particularly Treasury Inflation Protection Securities (Tips) will become more attractive as falling interest rates in the US and Europe increase the risk of inflation. Bond houses can also short long-duration paper in case the recent increase in liquidity raises inflation concerns.

ôFor the past few months, our focus has been our cash position and our liquidity,ö Ravano says. ôIf you have this, you will outperform.ö

Although many global CIOs, particularly in the equities world, are now arguing that equities look quite attractive compared to bonds, Ravano disagrees. He believes equity marketsé attractiveness depends on sustained profitability and are vulnerable to earnings disappointments. Bonds today donÆt have that problem and fixed-income assets are cheap. He says credit, leveraged loans, high yield and emerging-market debt will have equity-like returns.