The two charts below, provided by Markit, show the evolution of corporate credit spreads since the beginning of 2008: the average credit default swap (CDS) spread of 125 investment-grade issuers in the case of iTraxx Europe and 45 sub-investment-grade issuers in the case of the iTraxx Crossover.

Both indices, the most commonly quoted benchmarks in the European credit markets, show spreads more than halving from peak levels earlier this year, implying a windfall gain both for sellers of credit protection and for holders of corporate debt.

Corporate debt investors have, if anything, done better than “pure” credit investors, since at the beginning of 2009 bonds were priced very cheaply when compared to related CDS, offering a so-called “negative basis”. This anomaly – where it was possible to buy a bond, hedge it with a CDS contract and achieve a risk-free profit – has now disappeared, but it stimulated significant inflows to bond funds during the first quarter.

According to Nizam Hamid, head of sales strategy at iShares in Europe, investors have also been attracted to ETFs as a means of gaining easy, transparent and on-exchange access to company debt securities in a single transaction, in contrast to the relative illiquidity of the corporate bond market and its comparative lack of trading transparency (deals in this area of the market have traditionally been transacted over-the-counter).

“Over the year to end-October, European corporate bond ETFs have seen €3.3 billion of net new assets, compared to total fixed income net asset flows of just over €5 billion. This means that corporate bond flows have been in excess of ETF government bond flows and even above flows into inflation-linked ETFs. Total bond ETF assets under management in Europe have reached €33.8 billion, with corporate bonds representing €5.9 billion of the total,” Hamid said.

An unsurprising response to this investor demand has been a spate of new fund launches. The three benchmark iShares corporate bond ETFs that were in existence last September (covering euro, sterling and US dollar corporates) have been joined by eight others: five more from iShares, two from Lyxor and one from CASAM. Investors are now offered funds that enable them to discriminate between financial and non-financial issuers (a response to the relatively heavy weighting of financial sector bonds in the key indices) and, to some extent, between different maturity segments.

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