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 11-months ahead of schedule.

Spreads have remained relatively stable through periods of volatility impacting more so equities and Gilts. Brexit and the death around it has barely had an impact. The Gilt market sell-off in September ate into returns which to the end of August had sat at 4.9% for the corporate bond index. Those returns recovered to the 5% level for the full year, with spreads 20bp tighter and the Gilts relatively well bid. The index at G+131bp is effectively a record tight.

ii) GBP Corporate Bond Index Spreads 2015-

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iii) GBP Corporate Bond Index Yields