August iboxx bond monitor: UK bonds continue surge

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Sophie Jacobs
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1 Markit iboxx monthly report August 2016 August iboxx bond monitor: UK bonds continue surge Bonds provided relatively flat returns last month as the possibility of a US rate rise saw investors continue to rotate into corporate bonds. Euro, dollar and pound denominated corporate bonds outperformed sovereign peers UK bonds continued to surge with inflation linked gilts returning nearly 10% over the month Investors still prefer corporate bond ETFs over sovereign peers The bond market was relatively calm last month as it took stock of the impact of recent central bank intervention to gauge possible policy next steps. The strongest hint of the way forward from central bankers came from Fed chairman Janet Yellen s yearly Jackson Hole speech in which she strongly suggested that the case for a near term federal funds rate increase was building in light of recent economic data. The market took heed of Ms Yellen s speech with treasury yields bouncing off their recent lows. This jump in yields saw the iboxx $ Treasuries index widen by 11bps, and wiped out a tenth of the index s year to date total returns; now up 5.5% for the year so far. Even in light of the recent jump in yields, the index is still over 60bps tighter for 2016 so far, which shows that investors aren t putting much stock on more than one rate rise before the end of the year. countries such as France and Germany most severely as the iboxx Germany and iboxx France, fell by 60bps and 73bps over the month in total returns respectively. Peripheral Italian and Spanish bonds delivered positive total returns over the month as investors continue to seek out the last bastions of yield in the eurozone sovereign space. UK sovereign bonds continued to buck the trend as investors continue to weigh up the ramifications of June s EU referendum. This uncertainty took 30bps off the iboxx Gilts index to set a new all-time low. These falling yields have translated into strong returns for investors as the index was up by 2.8% in August on a total return basis. European bonds also saw a slight pickup in yields as a positive July eurozone PMI survey took the possibility of further easing off the table. This yield pickup mostly impacted core Inflation linked gilts proved to be the winning trade over the month as the asset class delivered a staggering 9.8% as investors looked to protect themselves from a possible surge in inflation due to the collapse of the pound post Brexit referendum. The asset

2 class is now the best performing global asset class tracked by Markit s iboxx indices. While investors pondered the possibility of central bank intervention on sovereign bonds, their corporate peers continued to surge ahead which drove benchmark spreads lower across all three major global currencies. These falling spreads helped ensure that corporate bonds across all major currencies delivered positive total returns. Emerging markets The emerging market bond rally was largely unfazed by the potential of a near term US interest rate rise as both sovereign and corporate dollar denominated bonds issued by emerging market entities delivered positive total returns for the month. The former of the two asset classes proved to be the winning trade as it the iboxx USD Emerging Markets Sovereigns index delivered 1.7% for the month, 50bps more than its corporate peer. Brazilian bonds weren t able to capitalise on the Olympics as local currency bonds came lagged the rest of the emerging market pack, which was led by Russian bonds which delivered 1.8% of total returns for the month. Fixed income ETFs Fixed income ETFs enjoyed another strong month over August as the asset class registered inflows of over $12.3bn over the month. Investors continued to prefer corporate bonds over their sovereigns as investment grade, high yield and preference shares saw over half of the inflows. August s inflows mean fixed income ETFs have seen $88.7bn of inflows globally so far this year, which puts them in line to comfortably in line to beat last year s $123bn inflow record.

3 US UK Germany France Italy Spain US IG US HY EU IG EU HY UK IG UK HY EM Sov USD EM Corp USD Brazil Russia China India Turkey Mexico US UK Germany Markit Fixed Income Commentary Asset class returns August 12.0% Sovereigns/Corporates/EM/Inflation linked 10.0% 9.8% 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% 2.8% 2.7% 2.15% 1.6%3.1% 1.7% 1.8% 1.1%0.5% 1.4% 0.3% 0.6% 0.7%0.8% 0.1% 0.3% 0.26% -0.6% -0.6%-0.7% -0.8% -0.6% Year to date

4 Euros Return Details-August Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall -0.13% 5.72% 0.51% 0.03% -0.70% Sovereigns Eurozone -0.34% 6.18% 0.54% 0.05% -0.67% Germany -0.60% 6.32% -0.02% 0.07% -0.76% France -0.73% 6.95% 0.36% 0.09% -0.73% Italy 0.29% 4.57% 1.20% -0.03% -0.45% Spain 0.06% 6.36% 1.09% 0.01% -0.65% Portugal -0.71% -0.83% 2.80% 0.16% 0.48% Ireland -0.15% 4.91% 0.38% 0.03% -0.63% Corporates Corporates 0.26% 6.17% 0.84% -0.03% -0.95% Corporates A 0.20% 5.68% 0.61% -0.03% -0.87% Corporates AA -0.04% 5.73% 0.38% 0.02% -0.90% Corporates AAA -0.39% 8.51% 0.56% 0.04% -0.81% Corporates BBB 0.39% 6.72% 1.19% -0.05% -1.07% Financials 0.55% 4.63% 1.02% -0.09% -0.69% Banks 0.51% 3.96% 0.77% -0.09% -0.61% Insurance 1.34% 6.55% 2.38% -0.16% -0.86% Non-Financials 0.05% 7.32% 0.73% 0.01% -1.10% Basic Materials 0.23% 11.40% 0.72% -0.02% -2.46% Consumer Goods -0.15% 6.74% 0.72% 0.04% -0.94% Consumer Services 0.10% 7.46% 0.73% 0.00% -1.23% Health Care -0.08% 5.98% 0.71% 0.05% -0.83% Industrials 0.06% 6.18% 0.53% 0.00% -0.95% Oil & Gas 0.40% 8.85% 0.97% -0.07% -1.19% Technology -0.30% 8.07% 0.42% 0.06% -0.99% Telecommunications 0.16% 7.71% 0.81% -0.01% -1.08% Utilities 0.03% 6.90% 0.77% 0.02% -1.02% Covered 0.09% 3.64% 0.04% -0.02% -0.67% High Yield High Yield 1.58% 7.23% 3.49% -0.42% -1.81% High Yield B 2.60% 7.09% 5.57% -0.71% -1.89% High Yield BB 1.15% 7.70% 2.63% -0.27% -1.73% High Yield CCC 3.12% -1.45% 12.97% -1.68% 0.14% Inflation-linked France Inflation-Linked -0.95% 4.28% -0.71% 0.10% -0.58% Germany Inflation-Linked -0.56% 3.85% -0.85% 0.06% -0.53% Italy Inflation-Linked 0.55% 2.80% 0.41% -0.07% -0.29% ABS Europe ABS 1.62% 6.45% 788 Contingent Convertible Contingent Convertible 1.67% 1.57% 6.62% -0.46% 0.82%

5 US Dollar Return Details-August Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD $ Overall -0.23% 6.56% 2.34% 0.08% -0.73% Sovereigns $ Treasuries -0.57% 5.50% 1.70% 0.11% -0.62% $ Treasuries 1-3Y -0.17% 1.18% 0.81% 0.13% -0.27% $ Treasuries 3-5Y -0.50% 3.08% 1.09% 0.17% -0.51% $ Treasuries 5-7Y -0.74% 4.93% 1.33% 0.16% -0.63% $ Treasuries 7-10Y -0.84% 6.82% 1.52% 0.13% -0.70% $ Treasuries 10-15Y -0.91% 8.92% 1.65% 0.11% -0.77% $ Treasuries 15Y % 16.86% 2.15% 0.07% -0.80% Corporates $ Corporates 0.28% 8.97% 3.36% 0.00% -0.98% $ Corporates A 0.09% 7.60% 3.03% 0.02% -0.79% $ Corporates AA -0.01% 6.88% 2.75% 0.03% -0.81% $ Corporates AAA -0.01% 9.14% 2.96% 0.03% -0.67% $ Corporates BBB 0.55% 11.05% 3.83% -0.04% -1.24% $ Banks 0.25% 5.38% 3.07% -0.01% -0.65% $ Basic Materials 0.51% 14.98% 3.94% 0.00% -2.12% $ Consumer Goods -0.19% 8.39% 3.08% 0.06% -0.80% $ Consumer Services -0.02% 11.46% 3.44% 0.03% -1.03% $ Financials 0.26% 6.02% 3.14% 0.00% -0.70% $ Health Care -0.21% 9.06% 3.17% 0.06% -0.80% $ Industrials -0.11% 9.50% 3.14% 0.05% -0.96% $ Insurance 0.50% 8.29% 3.63% -0.02% -0.81% $ Non-Financials 0.29% 10.69% 3.45% 0.00% -1.11% $ Oil & Gas 1.49% 13.29% 3.98% -0.15% -1.56% $ Technology 0.45% 8.61% 3.18% -0.04% -0.72% $ Telecommunications 0.16% 11.91% 3.77% 0.02% -1.02% $ Utilities 0.27% 11.30% 3.49% 0.01% -1.09% High Yield $ Liquid High Yield 2.15% 13.21% 6.08% -0.33% -2.03% Inflation-linked $ TIPS Inflation-Linked -0.76% 5.74% 0.30% 0.09% -0.61% Emerging Markets $ EM Sovereigns 1.74% 13.49% 4.60% -0.13% -1.19% $ EM Corporates 1.15% 11.19% 4.73% -0.20% -1.66% Loans $ Leveraged Loans 0.78% 6.96% 1101 RMBS $ US RMBS Seniors 2.41% 10.48% 302 Convertible $ CVBX 1.08% 2.40% -0.55% -0.55% -1.46% Contingent Convertible $ Contingent Convertible 2.23% 6.18% 6.79% -0.35% -0.33%

6 Sterling Return Details-August Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall 2.77% 16.85% 1.26% -0.24% -1.38% Sovereigns Gilts 2.77% 17.53% 1.01% -0.22% -1.31% Gilts % 1.35% 0.12% 0.05% -0.59% Gilts % 4.53% 0.16% -0.03% -1.02% Gilts % 7.35% 0.25% -0.08% -1.26% Gilts % 11.85% 0.49% -0.11% -1.38% Gilts % 16.13% 0.82% -0.15% -1.29% Gilts % 32.18% 1.17% -0.27% -1.40% Corporates Corporates 3.11% 16.63% 2.34% -0.33% -1.60% Corporates A 3.46% 17.58% 2.23% -0.34% -1.59% Corporates AA 2.75% 17.00% 1.76% -0.27% -1.59% Corporates AAA 5.20% 28.28% 1.42% -0.31% -1.56% Corporates BBB 2.85% 15.54% 2.67% -0.33% -1.60% Banks 1.64% 10.18% 2.60% -0.23% -1.16% Basic Materials 4.32% 27.24% 2.39% -0.51% -2.98% Consumer Goods 1.85% 11.97% 1.70% -0.28% -1.65% Consumer Services 3.77% 20.02% 2.06% -0.35% -1.74% Financials 2.24% 11.67% 2.69% -0.29% -1.27% Health Care 4.93% 28.06% 1.89% -0.36% -1.84% Industrials 3.09% 18.33% 1.98% -0.31% -1.67% Insurance 2.95% 10.87% 3.75% -0.35% -1.09% Non-Financials 3.64% 19.86% 2.18% -0.35% -1.76% Oil & Gas 2.14% 12.15% 2.00% -0.28% -1.44% Telecommunications 2.70% 20.02% 2.45% -0.26% -1.76% Utilities 4.62% 22.15% 2.31% -0.39% -1.77% Collateralized Collateralized 3.03% 15.66% 2.19% -0.30% -1.39% Covered 1.51% 12.03% 1.26% -0.21% -1.48% ABS 2.76% 15.00% 2.35% -0.28% -1.35% MBS 2.03% 12.58% 2.18% -0.27% -1.35% Housing Associations 6.22% 26.21% 2.54% -0.39% -1.49% High Yield High Yield 2.70% 8.29% 5.03% -0.74% -1.08% Inflation-linked Gilt Inflation-Linked 9.77% 29.76% -1.80% -0.38% -1.10% Contingent Convertible Contingent Convertible 1.29% 2.76% 7.62% -0.13% 0.86%

7 Charts Euros

8 US dollar

9 Sterling

10 Asia

11 Fixed Income ETF flows ($m) Aug-16 YTD Type Europe USA Asia Total Europe USA Asia Total Broad Market 108 2,229 (39) 2,298 1,654 21, ,980 Sovereigns 1, ,772 7,549 9,818 1,404 18,770 Sub-Sovereigns ,935 (27) 4,907 Corporates IG 1,729 3, ,783 12,128 15, ,159 Covered (23) 0 0 (23) 344 (3) Convertible (107) (1) High Yield (74) ,998 4, ,441 Loans Asset Backed (0) 2, ,618 CDS (20) 0 2 (18) 157 (1) Inflation ,660 4, ,046 Money Market (232) 0 (34) (266) (54) 0 (8,612) (8,666) Preferred Stock 0 1, , , ,797 Yield-Curve Strategy Total 3,352 8, ,365 26,436 69,215 (6,951) 88,700 Simon Colvin Fixed Income Analyst Markit Tel: simon.colvin@markit.com For further information, please visit The intellectual property rights to this report provided herein is owned by Markit Group limited. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without Markit s prior consent. Markit shall not have any liability, duty or obligation for or relating to the content or information ( data ) contained herein, any errors, inaccuracies, omission or delays in the data, or for any actions taken in reliance thereon. In no event shall Markit be liable for any special, incidental, consequential damages, arising out of the use of the data. Markit is a trademark owned by the Markit group. This report does not constitute nor shall it be construed as an offer by Markit to buy or sell any particular security, financial instrument or financial service. The analysis provided in this report is of a general and impersonal nature. This report shall not be construed as providing investment advice that is adapted to or appropriate for any particular investment strategy or portfolio. This report does not and shall not be construed as providing any recommendations as to whether it is appropriate for any person or entity to buy, sell or hold a particular investment.

iboxx July bond monitor: Corporate bonds bounce back

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