iBoxx GBP Corporates Index data provided by Markit Group Ltd
i) GBP Corporate Bond Index Spreads
The sterling bond market trades (and always has) 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 debate has added a 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.
It’s been a different story in 2018. In the period to end July, total returns are at -1.8% and spreads have widened by just 28bp from G+131bp to G+159bp (end July). The range in spreads for the index has been G+118bp – G+164bp in 2018. The market has had a fair amount of supply in 2018 from all sectors of the market – HY, IG and senior and this might have contributed to some weakness in spreads, with only 5bp of tightening in July (versus 10bp in euro IG).