Investment grade bonds data: Hover over the charts to see the values at a given date. iBoxx EUR Corporates Index data provided by Markit Group Ltd.
These charts are updated monthly.
i) Euro Investment Grade Bond Index: Corporate Spreads
The period from late 2007 through to Q1 2009 coincided with the greatest widening in credit spreads ever seen. The excess systemic leverage/structured product bid leading to very tight spreads markets in the preceding 2003-2007 period was spectacularly undone.
We recovered hard in 2009 once the central bank easing began with money looking for a home in cheap, high yielding corporate bonds. 2009 coincided with the greatest spread tightening era ever seen.
While corporate bond markets sold off in late 2011-2012, we have seen a good recovery since. The compression trade, between high and low beta corporate bonds all the way down to and including the HY market was a key feature in the 2012-2014 years.
MiFID II is HERE
ii) Investment Grade Bond Index: Corporate Spreads 2015-
The steady tightening bias which saw the Markit iBoxx IG corporate cash index at record tights of B+81bp back in late Jan/early Feb gave up much ground into more volatile event-risk prone and wary markets through February and March. And it was in late March where we saw the index hit a recent high of B+108bp, some 29bp off the tights and 12bp wider since the beginning of the year.
The ECB has been busy still, although the monthly average haul of €7-8bn since the beginning of the QE asset purchase programme started fell to €5-6bn in Q1 this year, and we think it was no coincidence that the total monthly purchases across all programmes declined from €60bn to €30bn per month. They’re now at an average closer to €3bn of corporate bond purchases per month.
That is still a considerable extraction of liquidity from an already hugely illiquid secondary market, but the lower accumulations might be a result of not wanting to pay ‘at all costs’ for debt which might be getting more expensive because investors have become more reluctant to let paper go. For investors, the poorer supply from the primary market has added some risk regards getting in bonds to replace anything they sell.
In April, spreads tightened by 4bp to B+103bp, still 7bp tighter year to date with total returns for the index at -0.4%
iii) Investment Grade Bond Index: Corporate Yields
Yields from investment grade bonds have also backed up from the 2017 lows but the overall firmness in the underlying has helped keep them at still very low levels. We have been as low as 0.88% on the index and as high as 1.80%, but we’re lacking a clear trend now. There is a range being established though in the 1.10 – 1.20%. And index yields are 18bp higher in 2018 to end April.
We think it is unlikely that we were going to see the heady heights of Q1 2015 in corporate bond yields (0.79% index low), unless a Goldilocks economy and continued low default rate across Europe is complemented by a less volatile macro outlook and reduced levels of headline risks. It would appear that the correlation between rate markets in the US and Eurozone may have broken down for the moment, but we’re going to need a much weaker US economy and lower US rates to revisit a materially lower yield environment (in Europe).
The chart shows how the corporate bond market has benefited from QE – the need for investors to buy safe, higher-yielding assets while the high levels of demand have promoted the disintermediation in funding for the corporate sector. Event risk largely around US politics and to a lesser extent Brexit have prevented underlying yields from popping materially higher.IG Spread Analytics HY-IG Spread differential