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 September, total returns are at -2% and spreads have widened by just 28bp from G+131bp to G+156bp (end September). 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 it has had to face much uncertainty around the Brexit debate. But secondary has hun on, and been stable in the August to end September period.

ii) GBP Corporate Bond Index Spreads 2015-

iii) GBP Corporate Bond Index Yields