05.14.2014
By Terry Flanagan

Invesco’s Read Says Value Is Hard to Find in Fixed Income

Paul Read, co-head of fixed interest at asset manager Invesco Perpetual, said value has become hard to find in the bond market and investors are losing the ability to price credit correctly.

Read spoke at 2014 Morningstar Investment Conference UK in London. He said: “Value has become hard to find but the appetite for income is unbelievable.”

He gave the example of the Mexican government recently selling a 100-year £1 billion bond in London with a coupon of only 5.625%.

“In the last 100 years Mexico has gone bust a few times,” he added. “This shows the yield compression in the market and how central banks have been running the show for the last five years.”

Since the financial crisis investors have lost $750 billion each year in relatively safe income from assets such as government bonds and money market funds which has created a “desperation for income” according to Read.

Investors should not be drawn into too much risk at the wrong prices,” he warned. “In the last five to six years there have been amazing opportunities to buy securities at cheap prices but they have now gone. It will be a grind for the next few years.”

Central banks are not in a hurry to raise interest rates and the European Central Bank is more likely to cut rates next month according to Read. He said it will be at least two years before fixed income markets normalize.

The Federal Reserve is half way through stopping its monthly program of securities purchases, which is due to stop in November. Read said the US budget had improved massively as revenues had gone up while there was a cap on spending.

“The US has the best chance of growing out of its debt issuance,” he added.

However he said deflation was really bad news for Spain and Italy. “Their debt/GDP ratio is not improving and unless there is growth, their economies will be hard to stabilize,” he said.

As a result Read said his team was maximizing its allocation to equities, particularly this paying high dividends, and keeping a lot of liquidity in cash and short-term paper.

“Liquidity will not be there when we need it as dealer inventories have come down,” Read added. “The door to get out of the market is getting smaller and smaller and you have to be really careful about managing liquidity.”

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