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
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.
We have had a decent tightening in spreads in 2017, the performance really coming in April and June, but we’re unlikely visit the record tights seen on the iBoxx index before year end.
MiFID II Countdown
ii) Investment Grade Bond Index: Corporate Spreads 2015-
Q1 2015 threatened to see spreads tighten further into their all-time lows as the Markit iBoxx investment grade bond index fell through B+100bp (to B+94bp). Unfortunately, macro jitters and contagion from the US shale bubble busting impacted corporate bond markets and we have seen some severe retracement in spreads through 2015 and early 2016.
Now? The corporate bond market has quietly and impressively taken a firm hold to finally play out in classic fashion – there is solid investor demand, clearly a low alternative in safe’ish ‘yielding’ assets, and only average levels of new bond supply – and thus a consistent tightening in spreads. We’re facing records in valuations in the corporate bond market everywhere we look. And it is leading to levels of performance we very few would have imagined at the beginning of the year. That performance is all the more impressive following that rather brutal rate sell-off at the end of June, but we guess is supported by a global economy still playing out in Goldilocks fashion.
Investment grade markets in Europe have been supported by €113bn of direct ECB support over the past 17-months. IG spreads are now under 15bp or so away from setting new records, measured by the Markit iBoxx index (target B+94bp, currently at B+107bp). And even after that 30bp adjustment higher in 10-year Bund yields for example, we’ve managed to garner +1.6% of performance on 27bp of index spread tightening in 2017 so far.
iii) Investment Grade Bond Index: Corporate Yields
Yields from investment grade bonds have also backed up but the rally in the underlying has helped keep them at still very low levels. We have been as low as 1.02% on the index and as high as 1.80%, but the we’re lacking a clear trend now. There is a range being established in the 1.10-1.25% area although the rally in rate markets through September saw to it that we broke lower and into the 1-1.10% domain.
We are unlikely 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 complimented by a less volatile macro outlook and reduced levels of headline risks. That might spur on the compression trade and with underlying yields anchored, credit spreads could resume a ratchet tighter.
The chart shows how the corporate bond market has benefited from QE, the need by investors to buy safe, higher yielding assets while the high levels of demand have promoted the disintermediation in funding for the corporate sector. We’re heading into September in confident form, into hopes of high levels of primary. iBoxx index yields might break 1.00% again.Click here for Spread Analytics