iboxx July bond monitor: Corporate bonds bounce back

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1 iboxx July bond monitor: Corporate bonds bounce back After seeing spreads widen over June, corporate bonds bounced back over July as investors regained their appetite for risk assets. Euro, dollar and pound denominated corporate bonds outperform their sovereign peers Emerging market bonds performed much more strongly than developed market peers Investors load up on both high yield and investment grade corporate bond ETFs Corporate bonds stole the limelight in the bond market over July. The asset class suffered a setback over June as the market demanded higher spreads off the back of the Brexit driven uncertainty, but the renewed market appetite for risk in the last four weeks has seen this trend reverse in earnest with spreads across both investment grade and high yield bonds retreating on both sides of the Atlantic. Markit iboxx monthly report July 2016 While euro, dollar and sterling sovereign bonds did manage a positive month, the spread retreat in corporate bonds means that these returns lagged their higher risk peers by quite a wide margin according to Markit s iboxx indices. This spread was most evident in sterling denominated corporate bonds where the total return gap between sovereign and investment grade bonds came in at 3.1%. This return differential was driven by a return to calm as the immediate brexit uncertainty eased away as well as anticipation that the Bank of England may undertake some additional quantitative easing in order to counteract the economic hit the referendum is likely to have on the economy. Inflation hedged gilts, which were the best performing asset class in the days immediately following the results of the referendum, were not able to continue their strong run of form over July as the asset class fell by 0.1% on a total return basis. This indicates that investors are tapering their inflation expectation for the country after last month s record surge in breakeven inflation as the pound tumbled in earnest. Emerging market The increased appetite for risk assets is also evidenced in the surging demand for emerging market bonds which continued their strong run from over July as the market discounted the possibility of US interest rate rises after a disappointing second quarter US growth number. Dollar denominated emerging market sovereign bonds returned 1.1% more than US treasuries over the month as their spread retreated by 18 bps to 311bps.

2 Indian bonds proved to be the winning trade for locally listed bonds as rupee denominated bonds returned over 2.8% for the month. Turkish lira denominated bonds missed the rally as the country fell victim to a failed coup. The resulting selloff meant that the country s bonds fell by over 1% on a total return basis, the most out of any major bond asset class over the month. Energy bond rally stalls One part of the investment grade USD corporate bond world which proved relatively less buoyant than the rest of their peers was bonds issued by oil & gas firms. The asset class failed to rally by as much as the rest of their corporate peers as West Texas Intermediate Oil suffered its worst month of the year in July. Despite these headwinds, these bonds still managed to see their spreads retreat by 7bps. Asian bonds rally Dollar denominated Asian corporate bonds also enjoyed a strong month as the yields of both the conventional and high grade Markit iboxx AHBI indices shrank to new yearly lows. Local currency Asian bonds also saw their yields shrink as investors warmed up to the asset class. The Markit iboxx ALBI index now yields 3.14%; 71bps lower than last at the start of the year. Fixed income ETFs Fixed income ETFs enjoyed a very strong month to start the third Quarter on a high as the asset class registered inflows of over $15.6bn over the month. Investment grade corporate bond ETFs saw a third of these strong inflows with investors piling $5bn into the asset class over the month. High yield bonds also enjoyed the renewed appetite for risk assets as the asset class snapped a two month outflow steak and registered inflows of over $2bn. July s inflows mean fixed income ETFs have seen $76bn of inflows globally so far this year, which puts them in line to comfortably in line to beat last year s 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 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 overview Sovereign (unless stated) Year to date 20.0% 18.0% 18.1% 18.2% 16.0% 14.0% 14.3% 13.1% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 6.1% 10.8% 8.7% 6.9% 7.7% 6.3% 5.9% 5.5% 4.2% 11.5% 9.9% 5.4% 10.4% 9.6% 9.1% 6.6% 4.9% 2.4% 4.4% 0.0% July % 5.2% 5.0% 4.0% 3.6% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 2.3% 2.1% 2.2% 1.7% 1.1% 1.3% 1.2% 0.7% 0.3% 0.2% 1.4% 1.5%1.9% 0.4% 0.1% 2.8% -1.1% 0.4% 0.3% -0.1% 0.2%

4 Euros Return Details-July Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall 0.94% 5.84% 0.48% -0.12% -0.73% Sovereigns Eurozone 0.80% 6.52% 0.49% -0.09% -0.72% Germany 0.17% 6.95% -0.09% -0.02% -0.83% France 0.67% 7.72% 0.27% -0.07% -0.82% Italy 1.08% 4.25% 1.23% -0.13% -0.42% Spain 1.30% 6.27% 1.08% -0.16% -0.66% Portugal 1.29% -0.14% 2.64% -0.17% 0.32% Ireland 0.86% 5.05% 0.36% -0.12% -0.65% Corporates Corporates 1.72% 5.88% 0.87% -0.29% -0.92% Corporates A 1.55% 5.45% 0.64% -0.25% -0.84% Corporates AA 1.19% 5.76% 0.37% -0.20% -0.92% Corporates AAA 2.24% 8.93% 0.52% -0.24% -0.85% Corporates BBB 2.02% 6.29% 1.24% -0.35% -1.02% Financials 1.55% 4.04% 1.11% -0.28% -0.60% Banks 1.26% 3.42% 0.87% -0.24% -0.51% Insurance 3.19% 5.12% 2.55% -0.44% -0.70% Non-Financials 1.85% 7.25% 0.73% -0.30% -1.11% Basic Materials 2.21% 11.13% 0.74% -0.42% -2.43% Consumer Goods 1.74% 6.88% 0.68% -0.28% -0.98% Consumer Services 2.05% 7.34% 0.73% -0.34% -1.23% Health Care 1.38% 6.05% 0.66% -0.21% -0.88% Industrials 1.55% 6.10% 0.53% -0.25% -0.94% Oil & Gas 1.73% 8.40% 1.03% -0.27% -1.13% Technology 2.32% 8.39% 0.37% -0.31% -1.05% Telecommunications 2.09% 7.52% 0.83% -0.32% -1.07% Utilities 1.98% 6.85% 0.75% -0.33% -1.04% Covered 0.69% 3.53% 0.06% -0.14% -0.65% High Yield High Yield 2.19% 5.54% 3.91% -0.51% -1.39% High Yield B 2.19% 4.36% 6.28% -0.51% -1.18% High Yield BB 2.21% 6.46% 2.90% -0.51% -1.46% High Yield CCC 1.60% -4.46% 14.64% 0.57% 1.81% Inflation-linked France Inflation-Linked 0.52% 5.27% -0.81% -0.07% -0.68% Germany Inflation-Linked 0.17% 4.43% -0.91% -0.03% -0.59% Italy Inflation-Linked 0.59% 2.22% 0.48% -0.06% -0.22% ABS Europe ABS 1.62% 6.45% 788 Contingent Convertible Contingent Convertible 4.81% -0.71% 7.08% -1.04% 1.28%

5 US Dollar Return Details-July Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD $ Overall 0.60% 6.79% 2.27% -0.05% -0.81% Sovereigns $ Treasuries 0.30% 6.09% 1.59% -0.02% -0.73% $ Treasuries 1-3Y -0.04% 1.35% 0.68% 0.05% -0.40% $ Treasuries 3-5Y -0.03% 3.59% 0.92% 0.03% -0.67% $ Treasuries 5-7Y 0.11% 5.69% 1.17% 0.00% -0.79% $ Treasuries 7-10Y 0.21% 7.71% 1.38% -0.01% -0.83% $ Treasuries 10-15Y 0.43% 9.89% 1.54% -0.03% -0.88% $ Treasuries 15Y+ 1.51% 18.04% 2.09% -0.07% -0.87% Corporates $ Corporates 1.24% 8.65% 3.36% -0.12% -0.98% $ Corporates A 1.06% 7.48% 3.01% -0.11% -0.81% $ Corporates AA 0.67% 6.87% 2.72% -0.07% -0.84% $ Corporates AAA 1.12% 9.13% 2.93% -0.08% -0.70% $ Corporates BBB 1.58% 10.42% 3.87% -0.16% -1.19% $ Banks 0.92% 5.10% 3.08% -0.12% -0.64% $ Basic Materials 2.14% 14.37% 3.94% -0.21% -2.12% $ Consumer Goods 1.19% 8.58% 3.02% -0.13% -0.87% $ Consumer Services 1.68% 11.45% 3.41% -0.16% -1.07% $ Financials 1.02% 5.73% 3.14% -0.13% -0.70% $ Health Care 1.49% 9.27% 3.11% -0.13% -0.86% $ Industrials 1.35% 9.60% 3.09% -0.13% -1.01% $ Insurance 1.62% 7.74% 3.65% -0.15% -0.79% $ Non-Financials 1.36% 10.35% 3.45% -0.12% -1.11% $ Oil & Gas 0.74% 11.61% 4.14% -0.05% -1.40% $ Technology 1.15% 8.10% 3.23% 0.01% -0.67% $ Telecommunications 1.95% 11.70% 3.75% -0.18% -1.04% $ Utilities 1.44% 10.98% 3.49% -0.13% -1.10% High Yield $ Liquid High Yield 2.34% 10.79% 6.41% -0.42% -1.70% Inflation-linked $ TIPS Inflation-Linked 0.30% 6.56% 0.21% -0.02% -0.70% Emerging Markets $ EM Sovereigns 1.41% 11.53% 4.73% -0.15% -1.06% $ EM Corporates 1.54% 9.91% 4.93% -0.26% -1.46% Loans $ Leveraged Loans 1.41% 6.11% 1122 RMBS $ US RMBS Seniors 2.12% 7.88% 302 Convertible $ CVBX 5.19% 1.30% -0.38% -0.95% -1.29% Contingent Convertible $ Contingent Convertible 4.17% 3.86% 7.14% -0.77% 0.02%

6 Sterling Return Details-July Markit iboxx Index Total Return Yield OAS Bonds Duration Month YTD Current Month YTD Current Month YTD Overall 2.71% 13.68% 1.49% -0.23% -1.14% Sovereigns Gilts 2.12% 14.35% 1.23% -0.17% -1.09% Gilts % 1.38% 0.08% -0.03% -0.63% Gilts % 4.37% 0.19% -0.08% -0.99% Gilts % 6.89% 0.33% -0.11% -1.17% Gilts % 10.73% 0.60% -0.22% -1.27% Gilts % 14.19% 0.96% -0.24% -1.15% Gilts % 25.24% 1.44% -0.18% -1.13% Corporates Corporates 5.20% 13.09% 2.67% -0.56% -1.27% Corporates A 5.44% 13.62% 2.57% -0.54% -1.26% Corporates AA 4.17% 13.85% 2.03% -0.43% -1.32% Corporates AAA 4.24% 21.91% 1.73% -0.26% -1.25% Corporates BBB 5.26% 12.31% 3.00% -0.65% -1.26% Banks 4.52% 8.38% 2.83% -0.63% -0.93% Basic Materials 6.75% 21.95% 2.91% -0.83% -2.47% Consumer Goods 3.20% 9.91% 1.98% -0.48% -1.37% Consumer Services 5.01% 15.64% 2.42% -0.48% -1.39% Financials 4.58% 9.20% 2.98% -0.58% -0.98% Health Care 7.11% 22.02% 2.25% -0.53% -1.47% Industrials 4.71% 14.75% 2.30% -0.49% -1.36% Insurance 5.38% 7.66% 4.11% -0.68% -0.74% Non-Financials 5.58% 15.62% 2.52% -0.55% -1.41% Oil & Gas 3.84% 9.77% 2.28% -0.53% -1.15% Telecommunications 5.66% 16.84% 2.71% -0.57% -1.50% Utilities 6.61% 16.73% 2.70% -0.60% -1.38% Collateralized Collateralized 2.90% 12.24% 2.49% -0.29% -1.08% Covered 2.44% 10.34% 1.47% -0.34% -1.27% ABS 3.18% 11.88% 2.63% -0.32% -1.07% MBS 2.22% 10.31% 2.45% -0.27% -1.08% Housing Associations 4.00% 18.80% 2.94% -0.26% -1.09% High Yield High Yield 3.63% 5.41% 5.77% -0.87% -0.34% Inflation-linked Gilt Inflation-Linked -0.14% 18.20% -1.42% 0.00% -0.73% Contingent Convertible Contingent Convertible 1.29% 2.76% 7.62% -0.13% 0.86%

7 Charts Euros

8 US dollar

9 Sterling

10 Asia

Fixed Income ETF flows ($m) Simon Colvin Fixed Income Analyst Markit Tel: +44 207 264 7614 Email: simon.colvin@markit.

11 Fixed Income ETF flows ($m) Simon Colvin Fixed Income Analyst Markit Tel: 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.

August iboxx bond monitor: UK bonds continue surge

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