2nd June 2017

May 2017 data update

What May’s end of month figures reveal about the corporate bond market

May was good for the corporate bond markets. From a total returns perspective, they’re up 0.4%, 0.7% and a stunning 1.5% for IG, HY and sterling corporates, respectively. That’s all come on index tightening (Markit iBoxx) of 3bp, 27bp and 9bp, respectively, in the month.

Returns dataclick here (Charts and analysis)

Broken down, much of the performance has come from the rally in the underlying for sterling; spread performance in HY and the anchoring of the front-end of the curve for this shorter duration product – while IG risk has benefited but less so from both.

We are looking for June to play out with a similar construct, although there might be a jitter or two around the UK election, unlike the French parliamentary ones which seem to be heading for a more ‘market friendly’ result.

After that poor April for IG non-financial issuance, we recovered well in May – helped along by some big borrowings from the likes of GE (€8bn), LVMH (€4.5bn), Allergan (€2.7bn), Apple (€2.5bn) as well as EoN and IBM (€2bn each). And that high level of supply did not negatively impact spreads, although not all deals in the month have managed to trade through re-offer levels.

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

At this stage, it’s probably as important- if not more – that investors get some risk on board. The corporate bond markets have had a better than expected time of it in 2017 so far. High yield has returned a stunning 3.6% so far with investment grade total returns at a not-to-be-sniffed-at 1% year to date. There’s no need to change strategy in June.

The high yield market has spreads at around record low levels and we would think this month ought to see that go deeper into record territory as the crowding out from the ECB’s IG non-financial paper accumulation continues to depress secondary market liquidity and spreads/yields in IG.

It should therefore hold little fear to allocate more to HY given the basic dynamics for this market – supply, demand, fundamentals and macro – are all supportive. IG investors have been increasingly prevalent in this market over the past several years, and we expect this to stay the case through the remainder of this economic cycle. There is a trend in place, so just go with it.

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

Have a great weekend.

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.