Paul Read: Income back to main driver of total returns

BONDS

It is now a little over a year since sterling BBB spreads peaked at over 1000bps, offering what I, and many other bond fund managers, described as a once-in-a-career opportunity.

After what has been an incredible 12 months of capital appreciation, and with BBB spreads now at around 275bps, it is back to income being the main driver of total returns. Although many of the more defensive areas of investment grade are looking more or less fully valued, there are still pockets of value, most notably in financials in my opinion. While there are many examples of subordinated bank bonds that have more than tripled in value, in many cases spreads are still wide of where they were before the Lehman Brothers bankruptcy, so there is still opportunity for further tightenin...