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, we look for more normal markets in 2017. We’re actually probably there given that the BoE has now successfully completed 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. 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 have now fallen to 3.4% in the year to end November (FTSE +2.6% in the same period), as Gilts yields edged higher while spreads moved 6bp wider.