Last year, sterling investment grade credit spreads hit their lowest levels since 2007. With a quantitative easing (QE) programme in place that included the purchase of corporate bonds, and with fiscal programmes including the furlough scheme and bounce-back loans, corporates garnered extremely strong support from policy makers, quelling the likelihood of default.
Although we saw sterling investment grade markets trade at the upper limit of the price range we might usually expect, they continued to pay investors incrementally over the levels we believe are required to be fairly compensated for the risk of default. With this in mind, we do not expect overall returns in 2022 to be driven by improvements in corporate pricing. With support for markets rolling back – the Bank of England drew its QE programme to an end in December – we expect bond yields to rise (and prices to fall) in the sterling market this year.
Risk in the absence of traditional credit drivers
We still believe the risk of default is low and will remain low through the year – corporates in the UK have built strong balance sheets with the help of monetary and fiscal policy makers, and many have large cash balances. However, this support has restricted the risks which traditionally drive markets, leading their prices to be more closely tied at present to the underlying gilts of the same maturity. This led to significant volatility into the end of 2021, as investors in UK markets mistakenly priced in a high certainty of a November Bank of England rate rise , and reacted to the emergence of the new Omicron variant of Covid-19 in the same month. We expect sterling markets will continue to take their lead from gilts through 2022.
The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.