13 Jun 2022 3 min read

Is income returning to fixed income?

By Mark Benstead , Corinne Lewis-Reynier

2022 to date has been the worst ever total return period for credit investors as yields have risen and spreads have widened. However, the return of income to the asset class could mark a new era for investors.

Is income returning to fixed income.jpg


Remember when bonds were bought for income and equities for capital gain?

It feels like it was a long time ago, with the lengthy bull market in bonds delivering decent capital gains and equities becoming the ‘go-to’ asset class for income seekers.

The last 25 years has seen the average annual total return from the non-gilt sterling investment-grade market as over 6%, with investors experiencing only three negative years – 2008, 2018 and 2021. However, given the 2022 return is currently approaching -10, a second consecutive year of negative total returns feels possible.

What has driven this year’s awful performance?

2022 has been a perfect storm for fixed income credit, as central banks around the world have changed their baseline assumptions from transitory to sticky inflation, and sticky to transitory GDP recovery.

Both the resulting policy pivots and subsequent market reactions have been dramatic.

There have been c. 85 rate hikes so far in 2022[2] as global central banks look to deliberately slow economic growth to drive out inflation. Extrapolation is rarely an accurate guide to the future, but at the present pace we could be looking at over 200 rate hikes in 2022!


Income: back in the black?

Income has historically made up an important part of total returns, although it has obviously become less powerful as yields have fallen.

While there is no guarantee history repeat itself, this has traditionally been the level of yield at which capital is typically preserved.


Yields on Sterling Non-gilt Index_SMALL.png

We believe the outlook for total returns is set to remain uncertain or even challenged – but what about the prospects for the relative return of credit versus gilts?

Here, we see potential prospects for excess returns – ie. those over the risk-free rate – given the spread move we have seen, especially with sterling credit spreads at current levels.

The chart below shows the three-year excess return of investment-grade credit over the last 15 years. Only rarely has this been negative.

3-year GBP IG Credit Excess Return_SMALL.png


The table below provides more detail. With sterling investment grade spreads round their current 60th percentile, our analysis suggests the excess return over the long term could be up to 3.48%:


Expected excess return.png


Investing is never without risks, however. It is possible that a full-blown recession moves credit spreads across 20 percentiles of historical data – in a recession, spreads could as much as double – although rate cuts and a resulting fall in risk-free yields would insulate investors from this. It’s also possible that inflation could remain sticky and broad-based, in turn driving the US Federal Reserve to  action that could have a negative impact on fixed income and total returns.

It’s also too early in the cycle for any visibility on what could happen after a recession prompted a wave of credit defaults. Investment-grade defaults are generally rare – but rising default risk does affect investment-grade by driving spreads wider.

To summarise: 2022 to date has been the worst ever total return period for credit investors as yields have risen and spreads have widened.

However, the return of income to the asset class could mark the beginning of a new era for investors.



[1] Source: Bloomberg as at 24 May 2022

[2] Source: Bloomberg as at 24 May 2022



Mark Benstead

Head of Pan European Credit

Mark is the Head of Pan European Credit with responsibility for sterling and euro investment-grade credit teams. He is the lead fund manager on the sterling flagship retail funds. Mark joined LGIM in 2014 from AXA Investment Managers where he held the title of Head of Credit, UK. Mark was closely involved with AXA’s successful entry into the buy and maintain credit strategy as well as delivering above-target performance on a range of segregated and annuity funds. Prior to that, he was at the Royal Bank of Canada in a variety of senior capital market roles, latterly as Managing Director, Head of Syndicate and European Debt Capital Markets. Mark graduated from the University College of North Wales with a BA (hons) in Economics in 1984 and from the University of Bradford Management Centre with an MBA in 1985. He also holds the Investment Management Certificate.

Mark Benstead

Corinne Lewis-Reynier

Head of Active Fixed Income Investment Specialists

Despite hailing from the south of France, Corinne has always been more interested in the intricacies of global finance than sunshine and the beach. This meant she built a career in the City of London career where, despite growing to enjoy tea, the British weather, fish and chips, and Jaguar E-Types, she has retained a preference for Gallic cheeses and ciders.

She joined LGIM in 2018 and previously worked at BlackRock, where she was Head of European product specialists for short duration strategies. She has also worked at Morgan Stanley Investment Management as a senior portfolio manager, and started her career at JP Morgan Asset Management, where she was a portfolio manager and government bonds trader. Corinne earned an MA in Financial Risk Management from the University of Aix-en-Provence and a Master’s degree in International Economics from the University of Sussex. Corinne holds an MBA from London Business School.

Corinne Lewis-Reynier