Today, we have been given as close to a guarantee by the government (backing big banks) as any of us will ever see in our lifetimes. Pass up this give away and you will need new boots to kick yourself in the butt for many years to come.

Most people, and rightfully so, are stock market shy, especially in bank stocks. The beating has been unmerciful and over done. So let’s make some money on bank bonds.

Bonds are of a higher order than stocks. When there was a threat of a problem in the banks, the stocks dropped as much a 90% in months. Not the bonds. They dropped a fraction compared to the stocks and then rebounded to near PAR or higher and still paid interest to their holders.

By law, all bond issuers, banks, manufacturers, all of them, have to pay interest and their principle at maturity. Stocks have no legal backing requiring them to do anything even similar.

Bank bonds are so cheap right now, that it’s child’s play to pick big current yields, 8% and 9% and capital gains in excess of 20% and 30%, in less than 36 months!

Here’s one example.

Citigroup. I know, you don’t have to say it, C has had a tough time, but it isn’t going anywhere between now and Oct 2010. If we were talking about 10 or 15 years, I might agree with the critics, but not 18 months. Worst-case scenario is it is broken up and sold, or sold whole. In either case the bondholders still get paid.

Here’s how one bond return breaks down. It’s a 7.25% coupon, for sale at 76.5, or $765 per bond. It is rated A- and it is a firm rating, no downgrade is expected in the future. That’s a current yield of 9.47%.

Here’s how the return calculation looks: it has a yield to maturity of 27.34, but its total return, money in/money out, is four interest payments equaling $145, plus capital gains of $235.  When you divide by your cost of $765, you get a total return of 49.67% in approximately 18 months, giving you an annual average return of 33.11%.

Don’t feel like being that adventurous? Here’s a softer play.

Bank of America has been described by some of the best minds in the business as being poised to make huge returns in the next few years. Everything is in place, including their buy of Merrill Lynch.

Its stock almost doubled just on the news of Citigroup’s performance in the first two months of 2009.

Here’s a bond to look at BAC, 7.4% coupon maturing 1/15/11, selling for 88.5, or $885 and rated A-.

Here’s a maturity of less than two years, an A- rating, that has a yield to maturity of 15% and a total return of 29.71% ((2 x 74) + 115 / 885 = 29.71%) Current yield, (coupon divided by price) 8.36%.

If you’re willing to go out a little further than two years the gains are even bigger.

In this market, you need all the tools you can get to make it out alive. Look at the Bond Trader; we’ve been doing trades like this since last September, without a single loss.

Source: Hit the Banks for 33% Plus Annually