1st August 2017

Corporate bonds: The July Report

Welcome to the latest update for the corporate bond market to the end of July.

The month played out with the corporate bond market firmly on the front foot. Spreads continued to grind out some good tightening (8bp for IG and 16bp in HY – iBoxx index). For the latter, we are at record low levels after 136bp of tightening this year so far, while in IG we have just 9bp of tightening to go before we can say the same.

That will come by early September assuming the absence of any material event risk. However, the pick of the sectors is the CoCo market where the index yield crunched 60bp lower alone in July and is now 200bp lower this year at a record low of 4.07%. The index spread is just 35bp away from record lows. All this driven by the need for yield, a banking sector recovery and lack of AT1 supply.

SpreadsIG | HY | Senior & Sub Financials | Corporate Hybrids | GBP Corporates | CoCos (Charts and analysis)

So, we managed an impressive +0.8% and +0.85% in the month, respectively, for IG and HY returns on an index basis, while the longer-duration the sterling markets also delivered 0.8% of positive performance (index spreads 3bp tighter).

Sterling index corporate bond returns are up at 3.6% in the year to end of July, versus 4.6% for euro-HY and 1.2% for euro-IG.

Sovereigns are still in negative territory (to be expected given the rate sell-off this year) as they reside on 1% losses for the year so far – but after a small positive total return contribution in July (+0.1%).

Returns dataclick here (Charts & analysis)

July wasn’t such a bad month for issuance which came in fits and starts, but was probably overall more active than we might have anticipated. We’re not looking at a big August but holding out for the prospect for a decent flurry through to year-end from September.

Investment grade issuance closed the month with exactly €13bn issued. Senior bank supply disappointed with less than €3bn printed.In high yield, the month played out rather busily with 12 issues for €4,895m leaving us at a sprightly €38.8bn for the year to end July.

There is a good chance that we’ll achieve a record year given the declining funding costs borrowers are greeted with – into a very receptive investor base. That is even after we take into account some push-back on deals of late where particularly lower rated borrowers with some ‘testy’ covenant language – to say the least, have come up against investors not willing to fund them.

That is a positive development and should not act as an impediment to the vast majority of ‘properly’ priced and structured deals.

Issuance DataIG | HY | Senior Financials (Charts and analysis)

Suki Mann

A 25-year veteran of the European corporate bond markets and in his role as Credit Strategist, Dr Mann has been ranked number one in the Euromoney Investor Survey eight times in ten years. Previously with Societe Generale and UBS, he now shares views of events in the corporate bond market exclusively here on Credit Market Daily.