Lombard Odier raises concerns about fixed income

Mr Corrigan said we live in extraordinary times where the expectations for fixed income are quite challenging.

Speaking to Financial Adviser’s Simoney Kyriakou, Mr Corrigan said everyone is cognisant of the costs, especially because bond yields are low, and paying for products where yields are very low is something investors are worried about.

Mr Corrigan said: “If you are going to pay for a product in fixed income then don’t pay for a product that simply allocates your money to the people that have borrowed the most.”

He added that to avoid concentration risk, “we lend according to ability to pay and not capacity to borrow”.

“I think you have got to measure the cost implications and also the end result for investors currently in fixed income, which could be quite nasty given the concentrations in traditional approaches.

“The fixed income market has been somewhat slower than the equities market in embracing some of these difficulties.

“For now we have been sustained by very high returns and very low volatility and the support of central banks – they are the biggest asset managers these days.”

Mr Corrigan added that it must be remembered where things have gone badly wrong in the past, citing the early 2000s where the tech crash affected fixed income in a big way in the corporate debt market.

“You have also had the financial crisis that affected almost all of fixed income, particularly for corporates where you had large weights for financials.

“Today one of the things that people in the lower end of fixed income worry about is the big allocations to oil companies. This is something that the market capitalisation, or the traditional approach, tends to push you into.

“You are always going to be lending to people who borrow the most and as their prices go up as bond yields are going down then you are getting even bigger allocations than perhaps you rightly should have.”

emma.hughes@ft.com