3rd January 2018

Corporate bonds: The December 2017 Report

Let’s turn to the creditmarketdaily.com update for the corporate bond market to the end of December 2017.

We closed 2017 with the corporate bond markets delivering performance at the very top end of expectations. Spreads tightened by far more than anticipated, total returns topped any reasonable expectations with CoCos up at 17% for the year. Supply in IG was average while the high yield market’s issuance levels broke records asunder.

Spreads visited record tights across the board (we will include IG risk in that, as this market fell shy by just a basis point when measured by the Market iBoxx index), but bounced off them in November and failed to regain much impetus to push on again. In the last couple of weeks of the year, we did admittedly edge better.

For 2018, we are looking at positive spread performance again with the Market iBoxx IG index to tighten 15bp and the HY spread index to rally by 40-50bp, leaving them establishing new record levels.

Full spreads charts/analysisIG | HY | Senior & Sub Financials | Corporate Hybrids | GBP Corporates | CoCos

IG credit returned a superb 2.4% in 2017 while the IG market returned 6.3%, only for both to be beaten by a long way by the CoCo market which came up with 17% or more.

We won’t be anywhere near those levels this year, but we can still come up with over 1% in IG and 3% in high yield but would need rate markets to remain relatively friendly and spreads to tighten by the amount suggested above.

Returns YTD to end of December

Full returns data charts/analysisclick here

The primary markets saw issuance come in fits and starts but we still managed to get to the €265bn level in IG non-financials, with 16% of that total from US-domiciled borrowers.

Senior financials have had another light year for issuance as those pre-crisis era league table deals remain absent. The deals are now predominately senior non-preferrers in order to meet the new regulatory requirements.

HY Issuance: New Record

The stand-out primary market in 2017 was the high yield market. Anyone fretting about the so-called wall of funding that might impact borrower refinancing levels (2018-2020) ought to have their concerns assuaged by the record €75bn of issuance in 2017. That fantastic level of issuance is high unlikely going to be repeated.

Full issuance data charts/analysis: IG | HY | Senior Financials

Every issuance deal for the month: IG | HY

The extraordinary run for the corporate bond market is set to continue. In fact, the financial crisis of 2007/8 has been kind to the European corporate bond markets. The ECB is winding down its overall bond purchases so the perceived marginal buyer of risk is likely going to have a reduced impact on how much spreads can tighten (and the market perform). Still, given where we are, we should be closing out the year with record low levels of spreads in both IG and HY.

Suki Mann

A 30+ 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 CreditMarketDaily.com.