Yield Hog Alert: Buy GM Bonds

Are you a hog for yield?� If so, General Motors (GM) bonds are a screaming buy.� The automaker is in absolute distress, but the government has your back.� Why not take a shot at some very juicy returns here?

General Motors has given voice to a reality long recognized by observers and analysts around the world: the U.S. auto industry is doomed for oblivion without fundamental changes in their operations.

The announcement that GM will exhaust its cash reserves by mid-2009, or earlier, merely amplifies the facts already known to the public.

GM is a labyrinthine company without a distinct identity. In addition, General Motors is the personification of the credit tsunami afflicting many industries and companies worldwide.

In the case of GM, and probably many other companies starving for credit and sales, at least a part of the problem has been inflicted by a related company: the untimely tightening of credit standards at General Motors Acceptance Corporation (GMAC), which shut large numbers of previously qualified purchasers out of the automobile purchase market.

GM does have a number of steps it could take to return to being competitive with foreign brands. Reducing its Rube Goldberg array of lines, ramping up the production of fuel-efficient and electric autos and following through or accelerating the retooling and closing of obsolete production facilities are among the steps which are likely to be taken in the coming months.

Will these measures and others previously announced be enough? Only time will tell. But GM has one other tremendous asset which will in all likelihood buy the company extra time to gain new traction in the market…

Currently the company employs around 140,000 people in its United State operations. (See also: "Can GM Pull a U-Turn?")

With the U.S. economy in a major decline and headed into what many expect to be a prolonged recession, the administration and Congress are unlikely to stand by as America’s behemoth closes its doors.

Even a Chapter 11 filing would have consequences that are unacceptable to our political leaders. Reluctant suppliers would exact onerous terms for delivery of their products, competitors would seize on the weakness of GM to increase market share and valued employees would be easy prey for those same competitors.

Is there an investment opportunity lurking in the wings of disaster at GM?

Forget about the equity in GM as shareholder value is expected to go to zero.� Instead, check out the returns of GM bonds.

Currently priced to yield nearly 50%, the GM bond maturing in July of 2013 is generating a return likely to be attractive to the investors with an appetite for substantial risk in part of their portfolios. And with the high probability of an intervention by the U.S. Treasury under the Troubled Asset Relief Program (TARP), that risk may be substantially mitigated.

The application of TARP resources to GM and others in the auto industry was made even more likely with the election of Barack Obama to the oval office.� The risk/reward here appears to be weighted in favor of the investor.

This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com. James F. Dlugosch contributed to this article.�Jim has over 40 years experience in the credit markets including serving as Director of the Minnesota Housing Finance Agency in the 1970s.�He also led the fixed income group of a large regional brokerage firm before owning his own firm that specialized in underwriting and trading fixed income securities.� He is a contributor to The Rational Investor, but most importantly, he is my father.