When the data disagree, you still have to trade

The hardest part of running an investment-grade (IG) book isn’t being wrong. It’s having to make a decision when the data refuses to agree with itself. That’s where I live most mornings.

Right now is a textbook example. Sterling IG spreads are near the tights of the cycle. Fundamentals, on the surface, look fine. Interest cover is holding, default rates are low, primary markets are functioning. The macro tape is telling a different story: sticky inflation, term premium grinding higher, a Bank of England that wants to cut but can’t yet bring itself to. New issue concessions are thin. Secondary liquidity is patchy when you actually need to move size. Everything you’d want to be true for spreads to keep tightening is true. And yet the asymmetry feels wrong.

When it doesn’t pay to wait

The textbook answer when signals conflict is: wait for confirmation. I think the textbook is wrong. Waiting is a position, and in IG it is usually an expensive one.

Carry doesn’t pause while you make up your mind. The cost of being out of the market for a quarter at 5.5 - 6% all-in yields is real, and you don’t get it back when clarity arrives. By then the move has already happened.

So my framework, such as it is, isn’t really a framework. It’s three things I try to live by.

Size matters

First, separate direction from size. I might genuinely not know whether spreads tighten or widen from here. What I do know is which way I want to be leaning, and what that view should cost the portfolio if it doesn’t work. Sizing is the decision that usually saves you, not the directional call.

Where conviction lives

Second, pick the trades where the data disagrees least. If macro and fundamentals are pointing the same way for a particular sector or issuer, that’s where conviction lives - even if the top-down picture is muddy. Aggregate uncertainty doesn’t have to mean security-level paralysis.

Neck out and off the fence

Third, accept that conviction isn’t certainty. It’s a tolerance for being wrong in public, repeatedly, while the thesis plays out. If I needed to be right every quarter to feel comfortable holding a position, I’d never hold anything.

The ultimate question

What I’m watching now is whether the spread-fundamentals disconnect closes through better fundamentals or worse spreads. The honest answer is I don’t know - and the data won’t tell me until it’s too late to act on. The question I keep coming back to isn’t “What’s the right call?” It’s “What’s the right call when I have to make one before the right call is knowable?”

That’s the job. Anyone who tells you otherwise is selling a backtest.

Luke Hickmore is investment director, fixed income at Aberdeen.