Last Wednesday, US Fed officials reiterated their concern over the possibility of further economic deterioration and need for greater monetary policy intervention.Treasuries rallied sharply and stocks slid as escalating fears of a widening credit crisis this time emanating from the euro zone - resulted in higher interest rates being shown on many corporate bonds and fatter income yields offered on most dividend-paying stocks (a function of lower stock prices on stable dividend payouts).Clearly, investors have become increasingly fickle and are demanding bigger ‘risk premiums’ on a wide swath of investments.While this trend towards seeking safety amid heightened market volatility can be unsettling at times, the ongoing aversion to risk may also be providing some intriguing opportunities - particularly within the more defensive industries including the utilities and telecommunications sectors of the market.In a world starved for yield, even wary investors crave income.But with the global economy showing broad signs of deceleration, lower quality investments are a dubious proposition at best.Avoiding high yield ‘junk bond’ investments is probably good reasoning in this environment.However, in recent days even high quality stock and bond issues are offering substantially larger yield premiums than just a few months ago.Finding the perfect combination of quality and yield is always challenging, but worthy of consideration as opportunities are frequently presented.Indeed, looking across the spectrum of investment opportunities, the telecommunications sector may now be offering a reasonable balance.Humble OriginsA few decades ago, the telecommunications sector was seen as a stodgy industry with monopolistic characteristics, steady performance, limited competition but also limited growth.In the U.S. the telephone industry was highly regulated and almost entirely dominated by AT&T Corporation.That all changed in the 1980’s as new start up long distance companies were allowed to enter the market and ‘Ma Bell’ was eventually broken up into a number of regional bell companies (RBOC’s) in order to encourage greater competition and lower prices for consumers.At the same time, other countries began similar deregulation policies.For example, in 1990 Telefonos de Mexico (Telmex), Mexico’s only service provider, was privatized and other competitors allowed into the country for the first time.Since then, the telecommunications industry has gradually reconsolidated back into something resembling its former self.The new AT&T (a merger between its former RBOC’s: BellSouth and Southwestern Bell Corporation) has morphed back into America’s largest phone company and repositioned into a formidable ‘duopoly’ which together with Verizon Communications dominates the U.S. domestic phone market.Humpty Dumpty was put back together again!However, in recent months the consolidation phase appears to be reaching another break point as AT&T’s planned buyout of T-Mobile owned by Deutsche Telekom was unexpectedly put on hold in August by the Justice Department due to anti-trust concerns.Perhaps partly because of the confusion over what direction the industry will take next, shares of the sector’s stocks and bonds have lately underperformed other industrial sectors.The iShares index tracker for the US telecom industry has fallen behind the S&P 500 index by about three percent year-to-date as of this writing despite paying hefty dividends.In the bond market, some AT&T Corporation bonds are paying over 1.5% more in yield than comparable U.S. Treasury Notes, close to a record ‘spread’ over the past few years.Ma Bell No LongerWhile the publically-traded securities within the sector have not responded, the telecom industry has certainly undergone a rapid technological advancement which makes prospects for world’s largest phone companies appear quite solid.Thanks to the proliferation of rapidly developing hardware and software, demand for smart phones and mobile broadband is rising at a breakneck pace.Industry analysts estimate that smart phones will increase at a rate of 30% a year for the next few years not bad considering economists expect less than 2% growth for the developed world over the coming years.Importantly, recurring telecom services revenue tied to smarter devices is expected to grow sharply as smart phone users surf the internet, use multimedia-messaging services and increasingly go wireless on their laptops and iPads.Increased usage of higher-end applications and data services translate into rising average revenue per unit (ARPU), a closely watched industry metric.Despite the industry’s shift towards growth from the explosion of wireless devices and internet use, the sector retains its defensive quality.Consumers now view internet access and wireless communication as a necessity rather than a luxury.More than 80% of the U.S. population has a wireless phone today, double the penetration level in 2000 and nearly 75% of Americans use the internet, up from 44% in the early 2000s according to Morningstar research.The industry thus appears steady and continues to grow, but credit agencies caution that the business remains very competitive, particularly at the low end, requiring consistently high capital expenditures.Companies need to invest heavily in the latest generation technology to remain competitive.Nevertheless, the high level of capital required to stay in the game creates a major barrier to new competitors which benefits the entrenched companies.Adding to their attractiveness, the largest telcos pay high and rising dividends and most trade at reasonable market valuations. AT&T for example trades at just 12 times forward earnings, pays a dividend of over 6% and holds less than 25% debt as a percentage of its total assets.Yet like many large cap stocks, AT&T has barely budged in price over the last decade trading at the same price as it did nine years ago while the company’s dividends per share have increased by about 60 percent since then.While AT&T and Verizon appear to be offering attractive and stable return prospects in today’s market, other smaller companies and non-U.S. players also deserve some attention.On the international front, Deutsche Telekom, Europe’s largest phone company, has traded down to an all-time low stock price since its privatization 15 years ago and now yields over 8% according to Bloomberg data.In the smaller company space, the preference share market value also appears to be offering value.Qwest Communication, formerly part of AT&T and now owned by parent company Century Link sold new preferred shares earlier in the month at a yield of 7.5percent. – One benefit of the U.S. telcos and other American utility companies is their almost non-existent exposure to Europe if one wishes to side step the region for now.As we have seen during many of the prior financial setbacks, broad market declines often create opportunities for patient investors willing to the take the call.While the publically-traded securities within the sector have not responded, the telecom industry has certainly undergone a rapid technological advancement which makes prospects for world’s largest phone companies appear quite solid.Bryan Dooley is portfolio manager with LOM Asset Management Ltd. He can be contacted at bryan.dooley[AT]lom.com or on 295-6999.