Bonds soothe the soul in a nervous age

SO you feel nervous. You don't want to risk losing your shirt by putting it into the stock market. You feel irritated. Leaving your money in a savings account - even one of the best-paying ones - gives you only a paltry rate of interest.

So what to do? Is there any way to have a sporting chance of securing a reasonable return on your money without running the risk of suffering the sort of losses seen on equities over the past 18 months?

Certainly, share prices have staged a remarkable recovery from their nadir in the immediate aftermath of the 11 September attacks.

Had you had the courage to invest at the bottom of the terror-shocked market, you would now show an 18% gain. But still, the FTSE 100 index is almost a quarter below its peak at the start of last year.

No, for nervous souls, the stock market is still a pretty scary place to be. Certainly, central banks around the world may well be cutting interest rates like billy-o. The message from the US Federal Reserve, the European Central Bank and the Bank of England is consistent - there's little point in saving money, so you may as well spend it or invest it.

But even if money is virtually free, who wants to buy shares in companies when the earnings of those companies look so fragile? Relative security and the potential for relatively high gains is a combination that was elusive a year ago and it remains elusive today.

But look for a moment at bonds. What are they? They are IOUs issued by governments and/or companies. They pay out the same amount of money each year. They are safe. They are low risk.

Governments don't, generally speaking, go bust. Few companies stop paying what they are meant to on their bonds. Certainly, they do so far more rarely than they cut dividends on ordinary shares.

Little surprise, therefore, that investors in fixed-income funds have done well over the past year or so. The cash paid on a bond doesn't vary. Imagine a bond that pays out £10 a year. If interest rates are around 10%, then the bond would probably change hands for £100.

If interest rates fell to five%, then the same bond, still paying £10 a year, would be worth £200. Put simply - and this is only slightly too simple - a cut in interest rates means the price of bonds goes up.

Look at what interest rates have done over the past year. Twelve months ago, the Bank of England's base rate stood at 6%. After last week's cut, it is at 4%. Now look at what a typical fund with its money in low-risk bonds has done. Had you put in £10,000 a year ago and asked for the income to be reinvested, your holding would now be worth around £11,000.

Not a brilliant return, but far better than you would have got in the stock market, and comfortably above that from the most generous bank account.

And might such an investment show as plump a return in the coming year? We can be certain of nothing. But if interest rates continue to fall - far from impossible - then bonds should do better than most other investments.

They are safer than equities. They offer the prospect of better returns than a savings account. Yet fund management groups seem remarkably shy about promoting them.

Why? Could it by any chance be because the charges you or I pay on fixedinterest funds are generally far lower than those on funds that invest in shares? This thought, no doubt, is far too cynical to contemplate.

Sensible merger
Don't write off the idea that Airtours and First Choice will yet have their chance to merge. The tortuous process of appealing against the European Commission's 1999 decision to block Airtours' £950m bid for its rival is finally nearing a conclusion. And that conclusion may well clear the way for a tie-up.

Generally, we should be deeply sceptical when companies tell us a merger will be good for consumers, Britain and humankind. Too often, companies want to merge simply to gain the power to rip us off.

But in the case of Airtours and First Choice, there does seem some sense in allowing them to get together - or for a different combination of two of the big players to emerge.

The travel industry is intensely competitive. Would that change if we moved from having four major players to three? One suspects not. The industry's pain since 11 September offers a further reason to allow companies in tourism to save money by joining forces. From a commercial point of view, the logic of combining Airtours and First Choice remains the same as in 1999, when a merger was mooted. Savings could be around £70m a year.

Perhaps, just perhaps, their arguments will triumph.