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Corporate debt may nominally belong to the same asset class as government bonds, but in the current market conditions that is where the similarities end.

Amid growing fears of defaults, corporate bonds have been sold off like equities. Spreads over government bond yields have stretched to more than 400 basis points for some financials – two or three times the levels seen after the Enron bankruptcy or the collapse of Long-Term Capital Management.

The most obvious reason for this is that after a decade of cheap debt, credit levels in the financial system are now much higher than before. But the current banking crisis also has a broader economic dimension than previous default scares, as the readiness of governments to stage rescue operations has underlined.

But if government intervention has laid bare the economic risks, it has also protected senior bond holders. Northern Rock’s equity was wiped out, but its high-grade credit was transferred to the public books. This model was repeated in all the subsequent public and private takeovers. So far, only Lehman Brothers has actually defaulted.

This means investment-grade bonds do not deserve the equity treatment they are currently receiving, according to a number of industry experts.

“Defaults will rise, but not to the levels that justify the corporate spreads we’re seeing,” says Phil Collins at Newton Investment Management, who has an overweight position in investment-grade debt in his multi-asset fund. “We’ve disliked the equities of Western banks, but we’re very happy buying their bonds. That’s not a contradiction because bonds are higher up the capital structure.”

Mr Collins is not alone. It is hard to find a manager who does not consider corporate bond discounts excessively negative.

Ketish Pothalingam, who runs the pooled pension corporate bond funds for Threadneedle, says: “If you look at the five-year credit default swap indices, which give a broad outline of where the market is expecting default rates to go, we’re north of 10 per cent right now for investment-grade credit. It hasn’t got to that level since 1975, even in the worst of times.”

Managers also agree it is no time to invest in high-yield bonds.

Colin Graham, fund manager at BlackRock, says: “They’re behaving like equity. If you hold high yield in Bradford & Bingley, you won’t get anything back."

In times such as these, the real difference between investment-grade and junk debt becomes its level of protection in a rescue takeover, rather than whether it is called double-A or double-B. There is currently considerable uncertainty surrounding ratings, which has in turn pushed up yields, as managers with mandates to hold only investment-grade credit have been forced sellers of paper they fear is due for a downgrade.

But although spreads for all corporate bonds are at historic highs, no one predicts narrowing in the very near term. Mr Graham is building up his high-grade credit position with caution.

“Valuations can continue to get cheaper,” he says, noting they already looked unusually attractive at the beginning of the year.

“There is uncertainty everywhere you look at the moment. What’s the default rate? What’s the recovery rate? It’s something the credit market hasn’t had to deal with for a very long time. Most of the guys doing the analysis don’t remember the junk bond crisis in the 1980s."

Another unknown hitting bond markets is inflation. Rising commodity prices stoked up yields through the second quarter, then stagflationary fears receded in the third, as the credit crisis deepened.

But some commentators remain nervous about fixed income because of longer-term inflationary pressures. Peter Lucas, global investment strategist at Ashburton, the Jersey-based investment boutique, notes two causes for concern.

First, he sees increased government intervention ahead, which has historically been “bad news for inflation”. Second, China has artificially compressed Western bond yields and, therefore, interest rates, by building up vast reserves of US Treasury bills.

“We could be on the verge of a new era where China looks to reduce reliance on exports and encourage domestic consumption,” he says.

But Mr Lucas admits deflation is the greater short-term threat, with interest rate cuts likely in the fourth quarter. This would normally call for a move into short-dated government bonds, but with yields on three-month Treasury bills at just 29bps, there is little prospect of profit.

Mr Collins's view on government bonds is perhaps typical: “I don’t see where the opportunity is to make money, and I’m still struggling with the concept that we should continue to spot those opportunities.”

Stephen Wilmot is features writer at Investment Adviser