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 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 April, total returns are at -1.5% and spreads have widened by just 12bp from G+131bp to G+143bp (end April). The range in spreads for the index has been G+118bp – G+148bp. Weakness in the UK economy potentially derailing the potential for a rate hike this side of 2018 suggests we might get some renewed support for IG corporate credit in sterling.

ii) GBP Corporate Bond Index Spreads 2015-

iii) GBP Corporate Bond Index Yields