Our views

Three bond market trends this week

Jonathan Platt, Head of Fixed Income

11 May 2017

Across our fixed income team, we see three trends shaping bond markets this week:

1. Liability Driven Investment (LDI) demand aids volatile linkers
Conventional gilts have been fairly quiet, with yields fairly close to where they started the week. Meanwhile long dated index linked gilts have seen volatile trading, with real yields moving in a near 40bps range over the last month. In the last week  long dated break-evens moved  8bps higher, aided by continued interest from LDI buyers. 

2. Credit demand keeps spreads tight
A number of new issues in credit markets in the past week, both in the UK and in continental Europe, have seen very strong demand. In sterling investment grade credit, order books for new deals in GKN and Lafarge were several times oversubscribed, with prices tightening by 20-25 bps from the initial guidance in both cases. 

3. High yield demand avoids an oil slump
Despite recent weakness in the oil price, the energy segment of the high yield market, which makes up 15% of the index, has largely shrugged this off. A dearth of issuance, combined with feverish demand from investors still hungry for higher yielding debt has kept prices fairly buoyant. Bloomberg’s high yield energy index has moved just 0.32% lower in the past month, compared to a 12% drop in oil prices over the same period (see chart below).

Bloomberg USD High Yield Corporate Bond Index Energy versus Brent Crude Spot Oil

Source: Bloomberg as at 10 May 2017.

With the Federal Reserve likely to be a 'lone hiker' for some time to come, investor demand for assets offering some form of regular income continues unabated. While government bond yields in the UK have risen from the lows of last August, high yield and investment grade credit spreads remain towards 12 month lows. When markets get buoyed by a chase for yield it is generally time to step back, but unless there is a significant move higher in real yields it is difficult to see a material setback. We believe investors should, however, concentrate on credit fundamentals such as bond covenants, seniority and security  when investing in fixed income assets.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.