I keep hearing the same argument: sterling investment-grade credit spreads are near their tightest point in this cycle, so these bonds must be expensive.

I have made the argument myself. But I'm no longer convinced it tells the whole story.

A spread is the extra yield a company bond offers over a comparable government bond. For higher-quality sterling-denominated corporate debt, that extra yield is around 0.9%. Bonds prices rise when yields fall and fall when yields rise.

Since 2009, the spread has been narrower at a quarter-end on only three occasions. The long-term average at the end of each quarter is about 1.6%. 

On that measure alone, I can see why sterling credit looks expensive. But I don't think the spread captures the full picture. It's only the extra reward for taking credit risk, not the bond's total starting yield, and the total yield has changed significantly.

The spread is only part of the yield

At the end of 2021, sterling investment-grade bonds yielded 2.06%. The spread over government bonds was 1.14%, accounting for more than half the total yield.

Today, this market yields 6.15%. The spread is only 0.9% and represents less than 15% of the total. That means the underlying government-bond component accounts for roughly the other 85%.

The spread still matters. It compensates investors for risks including downgrades, defaults and difficulty selling bonds in stressed markets. But I don't see it as the only number shaping the outcome.

When government bonds yielded some 1%, the spread had to do most of the work of attracting investors. Today, government-bond yields provide most of the income, even before investors take on additional credit risk.

Higher income provides a larger cushion

Higher starting income from coupon payments can also provide more protection when markets move against investors.

Sterling investment-grade bonds, with an average tenor of around 5.5 years, now yield more than 6%. If government-bond yields remained unchanged, spreads would have to widen by about 1.1 percentage points (doubling from 0.9% to around 2%) to wipe out a year's worth of income. 

At the end of 2021, these bonds had an average maturity of some eight and a half years and yielded about 2%. A spread widening of roughly 0.25 percentage points would have erased the income.

This is an illustration, not a forecast. But it shows why two periods with tight spreads can present different risks. Today's higher income provides a much larger cushion.

Tight spreads don't settle the argument

None of this makes sterling credit cheap. Company bonds offer less extra reward for credit risk than they have historically. I still don't see enough value in some areas of this market.

But high overall yields and tight spreads can coexist. Both statements are true, even though one tends to dominate the conversation.

I'd urge you to ask how much total yield you're getting, as well as how far spreads would need to rise before absorbing a year's income.

Viewed this way, sterling investment-grade credit looks less stretched than a conventional spread analysis would suggest.

I'm not arguing for taking substantially more credit risk. But I've stopped treating 'spreads are at their tightest' as an automatic reason to sell.

The most expensive mistake in credit this cycle may not be owning tight spreads. It may be selling 6% income because one chart told us to.
 

Data source: Bloomberg Sterling Aggregate Corporate Index, including option-adjusted spread, yield and duration, and UK 10-year generic gilt yield. Data to 29 September 2026. Note: All views are those of the author. 

In this update we present the quarterly State of Trend report for Q3 2026.

Our report covers the performance of trend following systems compared with traditional investments such as the S&P/ASX 200 Total Return index, and the Australian 60/40 portfolio. Trend following provides exposure to a diverse pool of underlying instruments, and implements trading strategies systematically and without emotional biases. 

Trend followers pull ahead as the bond sell-off stalls conventional asset classes

• Traditional assets were roughly flat in Q3, as a September sell-off on rising bond yields and oil prices gave back earlier gains

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Key market movements in Q3 2026

• Energy markets surged and bonds sold off sharply in Q3, while equities were mixed
  • Bonds fell globally as central banks turned more hawkish. The US Federal Reserve and Reserve Bank of Australia both raised rates in September. US Treasuries posted steep losses, with yields reaching highs not seen since 2007. European government bonds also sold off, led by France, and Australian bonds slipped
  • The S&P 500 extended its gains, while Australian equities were broadly flat after a weak September. North Asian markets were volatile, and small caps lagged as rates rose

• Energy led commodities higher

  • Crude Oil and other energy markets rallied strongly as the US-Iran conflict escalated

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• Trend-following strategies benefited from diversified exposures, outperforming traditional asset classes

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• UK Natural Gas was one of the strongest performers in Q3, rising 75.3%. It is now up 134.1% over the past year. The rally followed a sharp fall in Q2, as the US-Iran conflict escalated and pushed global energy prices higher
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See the full report at our website.

Despite an extremely volatile reporting season, global equity markets pushed higher during the month. In the US, the S&P 500 and NASDAQ rose +1.9% and +1.6%, respectively, whilst in the UK, the FTSE edged +0.6% higher. Domestically, the ASX All-Ordinaries Accumulation index outperformed its international peers, increasing +3.2%. This was driven by the Materials sector (led by the gold sector) and Consumer Discretionary, supported by expectations of further rate cuts.

The expectation of further cuts by the RBA provided a material boost to small caps, with the ASX Small Ordinaries index rising +8.2% in the month. In comparison, the ASX 100 rose +2.1%, weighed down by sharp falls in large-cap names such as James Hardie (-25%), CSL (-21%), Dominoes (-18%), Reece (-18%), Wisetech Global (-15%) and Woolworths (-9%).

In bond markets, the US 10-year bond yield declined -15 basis points (bp) to 4.23%, whilst its Australian counterpart rose marginally by +2bp to close at 4.28%. The Australian dollar was stronger in June, closing at US$0.654, rising 1.2 cents.