The pair, in a note to investors, said they are still not enthusiastic about the prospects for attractive returns in many areas of the bond market, hence income will be crucial.
Read manages a number of UK, European and global fixed income products, while Edwards runs three global bond and cash portfolios.
Little high-end value
As with last year, said Read, there is not much value in investment grade bonds outside financials, and high yield does not appear to offer much capital appreciation going forward.
“But there’s still a really strong appetite for income,” he said. “You can see it in the highly attractive terms on which borrowers have been able to raise capital. This year, we’ve seen some of the lowest coupon deals I can remember in the credit markets, high yield as well as investment grade, but demand has been really solid. It’s a good time to be a corporate treasurer.
“The reason for this demand for income is easy enough to explain,” continued Read. “Sources of income like bank deposit interest, money market yield and the yield on high credit quality government bonds have been suppressed by central bank policy. That feeds through to the credit markets. Even compared to a year ago, there are fewer opportunities.”
Positive on financials
Edward added: “From the perspective of managing global bond mandates, I think we’re in an environment we’ve been in for several years. It’s still a low-yield world. We’re in a deleveraging cycle and that’s continuing to put downward pressure on growth and inflation. But there are differences too as we go into 2014. 2013 was a relatively crisis-free period. There was no euro crisis – that made a change.”
In terms of opportunities in the fixed income space, Read points to financials, particularly subordinated bank debt. “Yields have come down a long way in this area, and we’ve benefited greatly from that, but we see this as reasonable as the risk of these assets has got a lot lower too. We’re also holding positions in hybrid securities across financials and non-financials.”
For Edwards, a major opportunity could be the dollar, although with a slightly longer time horizon. “Cheaper energy costs are already reducing costs for US industry and could give it a long-term competitive advantage. This, along with greater domestic oil and gas production, would boost the dollar through an improved trade balance.”
