Sterling Corporate Market Spreads and Yields

iBoxx GBP Corporates Index data provided by Markit Group Ltd

i) GBP Corporate Bond Index Spreads

The sterling bond market usually trades at a premium to the euro one for several reasons. It is much smaller, it is even more illiquid, it is controlled by a few very large players and the information ratio is much poorer. Issue sizes are smaller too, and the sterling market is a longer duration one (7.5 years versus 5 years). Amid the early 2016 oil/commodity sell-off and the resulting equity weakness and volatility, we could and should have expected the sterling market to underperform (it did, slightly), but the Brexit situation doesn’t seem to have added much little fuel to that.

After a stellar year for returns in 2016 (+12%), we still managed +5% in 2017 helped in no small part by the BoE’s successful completion of its £10bn corporate bond QE, some eleven months ahead of schedule. In 2018, the market lost over 2% though, in total return terms.

But credit where it is due. The longer duration nature of the sterling market was the culprit. But… spreads on the index widened by only 60bp closing the year at B+190bp and yields moved less than 60bp higher for the index to 3.34% in 2018. That is, the market was relatively well-supported. Hard or soft Brexit, we don’t think this market’s dynamic versus the euro line will change much in 2019.

ii) GBP Corporate Bond Index Spreads 2015-

iii) GBP Corporate Bond Index Yields