"If you're going to hold a bond to maturity, there's a lot of bonds out there that people can actually buy," said Richard Bernstein, Merrill's chief investment strategist. "The problem right now is that there's absolutely no liquidity in the fixed-income environments. We may never go back to the liquidity we've seen in the fixed-income markets in the last 10 or 15 years. We may be going back to an environment where people hold bonds and clip the coupons."
The United States, in fact, could be heading toward a climate similar to Japan's in the early 1990s, when its economy collapsed under a real estate bubble and exaggerated easing in monetary policy, said David Rosenberg, Merrill's chief North American economist.
"I don't see this recession ending--maybe it will be called something different than recession when historians look back over time," Rosenberg said.
He said the economy has a real unemployment rate of 12 percent and a credit collapse the likes of which has been seen globally only three times in the past 100 years.
"This is something different than the reality we have lived through in the post-World War II period," Rosenberg said. "This is a credit collapse, so let's just be honest about the situation."
Investors can find safety in consumer staples, which will benefit from lower commodity prices, Bernstein said. He also said health care stocks, with strong yields and solid balance sheets, should provide return, but advised against holding cash other than for necessities.
"We're really becoming Japan," Bernstein said. "We're keeping zombie banks alive. we have a yield curve that's really flat getting flatter...Cash is probably not a good place unless you're so risk averse."
Bonds provide security while also bringing some return, both analysts said.
"I want secure income," Rosenberg said. "And I want duration, and the Treasury mark provides that."