Fear and greed, as we all know, drive the market. What we’ve found out this week is how quickly investors can become emboldened – and voracious.

It was only recently that one investment adviser recalled overhearing a debate between two nervous types about whether they should stuff their money under the mattress or buy gold. “What was the point of leaving money on deposit with rates often under 0.5 per cent, and the deposit- taker’s survival in question – even more so with shares, when the capitalist system is at risk of implosion?” ran the argument.

Now, just a few weeks later, stockbrokers are recording new record trading volumes by the day, with the only debate seemingly over whether to buy shares in Royal Bank of Scotland (RBS), Lloyds Banking Group or Barclays – or all three.

“The banking sector continues to have a strong pull for investors, as many hope to make a profit from current share price volatility,” runs the argument, according to one broker.

So what has changed? Not deposit rates – they remain at around 0.5 per cent on instant access accounts. Nor the relative merits of gold and bank shares – they remain equally unconvincing as either speculative plays or “stores of value”. As the aforementioned adviser reminded me, gold peaked at $850 an ounce in January 1980 and today stands at $928 an ounce – an annualised return of 0.31 per cent over 29 years. But, as any long-term bank shareholder will not care to remember, Barclays shares have put in a near identical performance, in price terms, over the last 13 years – a period in which the prices of RBS and Lloyds shares have both fallen.

Admittedly, a bank shareholder would at least have earned dividends in most of those years, rather than paying an annual custody fee for bullion (exchange traded commodities not being available to private investors back then). Even so, neither gold nor bank shares exactly qualify as reliable income or growth investments – and neither can be said to have provided a hedge against inflation, deflation or other asset classes for that matter, given their high correlations with equities.

So what has changed the sentiment so rapidly from one extreme to the other? Arguably, an unwillingness to be anything so wishy-washy as a slightly braver coward, or a moderately cautious hero. But had those fearless share dealers paid less attention to the banks’ trading updates and more to what the banks’ have been trading, they might have hit on a better investment.

Back on March 25, with an equity market rally still looking uncertain, Lloyds offered to buy back its corporate bonds from investors. RBS swiftly followed. And while the significance was clearly missed by the mattress stuffers-turned-equity- traders, it wasn’t lost on that investment adviser: Brian Dennehy of Denney Weller & Co. As he puts it in his monthly Bond Watch e-bulletin: “After a torrid year for the great bulk of investment-grade bond funds, the 25th of March could turn out to be a very significant turning point.”

To him, the offers to buy back bonds made by Lloyds, RBS and – more recently – Barclays, gave a strong signal that the banking system had stabilised. More importantly, it gave strong support to the prices of corporate bonds in the financials sector, and beyond. Dennehy believes it is no coincidence that, from the beginning of the year to March 25, only two out of 85 investment-grade bond funds (both from M&G) made any money – while from March 25 to the end of April, all but five of those 85 funds made money, some even in double-digit percentages. He now forecasts that bond funds with higher proportions in banks and financials are likely to outperform the rest of the sector for some time.

Uneasy risktakers still need to be aware of the dangers that lurk in the bond market, though. John Stopford, co-head of fixed income at Investec Asset Management, this week published a cautionary report entitled “Don’t be a hero… why you should stick to Investment Grade this year”, in which he warns that the high-yield corporate bond default rate is expected to rise yet further in 2009.

He also makes the point that, while corporate bonds still appear to offer value, the potential for generating returns could vary significantly between sectors. So he advises investors to stick to bonds issued by investment- grade-rated non-cyclical businesses.

Dennehy argues that the best bond fund managers are doing this – and private investors can make a reasonable estimate of likely returns by looking at the average price of the bonds they hold. For example, the bonds held by the Investec Monthly High Income fund have an average price of 73p – which, assuming they don’t default and mature at 100p, implies growth potential of 36 per cent. Similarly, the mainstream bond fund from Old Mutual, which has a larger proportion in banks than many of its peers, offers upside potential of 30 per cent on this measure.

Dennehy concludes: “For most investors, the right answer is having a balance, so you can benefit from economic and market recovery, yet not suffer too badly from a renewed market scare.”

Or as George Bernard Shaw put it: “You cannot be a hero without being a coward.”

matthew.vincent@ft.com