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.