Brexit Seems Increasingly Unlikely to Corporate-Debt Investors

Market Uncertainty Would Scare Off Brexit Vote: Hillier
  • Sterling bond premiums narrow as U.K. seen remaining in EU
  • Next, Travelodge bond sales highlight pickup in issuance

The corporate-bond market is signaling that investors expect U.K. voters to reject leaving the European Union.

Growing confidence that the nation will avoid a Brexit, and the resulting economic uncertainty, means investors are accepting narrower premiums to hold debt denominated in sterling instead of euros. The new-issue market has also revived, with companies including Next Plc and Travelodge Hotels Ltd. selling 2.5 billion pounds ($3.6 billion) of bonds in the last three weeks, according to data compiled by Bloomberg. That compares with 1.5 billion pounds in the preceding five weeks.

“The market is not as concerned about Brexit as it once was,” said Paola Binns, a portfolio manager at Royal London Asset Management Ltd., which oversees about 84 billion pounds. “Demand for some of the U.K. names is recovering.”

The bond-market trends mirror foreign-exchange moves. Sterling has risen against the dollar and the euro over the past two weeks, aided by opinion polls suggesting a lead for the campaign to remain in the EU. Bookmakers have also cut the odds on a June 23 status quo victory after the International Monetary Fund, Bank of England and U.S. President Barack Obama said that quitting the world’s largest single market could hurt the U.K.

“Corporate bond spreads are very much in the direction that Brexit is not going to happen,” said Andreas Michalitsianos, a global fixed-income portfolio manager at JPMorgan Asset Management, which oversees $1.7 trillion including sterling debt.

Borrowing costs in sterling for investment-grade issuers have fallen to 3.23 percent from 3.70 percent on Feb. 17, based on Bank of America Merrill Lynch index data. That’s outpaced a decline in the euro market, cutting the sterling-debt premium to 215 basis points from 235 basis points in March, the data show.

The pound, the main focus for traders speculating on Brexit, has strengthened to about $1.45 from below $1.39 earlier in the year. It’s also up to 1.30 against the euro from 1.24. Still, sterling remains among the worst performing major currencies this year, down 3.5 percent, according to Bloomberg correlation-weighted indexes.

Volatility measures for the currency suggest a remain win isn’t yet a done deal among investors. A gauge of price swings anticipated in a month’s time jumped to the highest since February on Monday as it encompassed the date of the vote for the first time.

Decision Time

Public sentiment may change in the run-up to the vote because that’s when many people will make up their minds, said Stephen Beer, chief investment officer of the Central Finance Board of the Methodist Church, which oversees more than 1.3 billion pounds. 

“I can’t see how the market can properly price in the risk at the moment,” he said. “It’s going to be in the next few weeks that the voters will focus more intensely on the issues.”

Michael Bloomberg, the founder and majority owner of Bloomberg LP, the parent company of Bloomberg News, has publicly supported the campaign to keep the U.K. in the EU.

Betting company William Hill Plc has shortened the odds on a remain win, and now sees an 85 percent chance. An Opinium poll published May 21 found “Remain” on 44 percent and “Leave”’ on 40 percent. The poll was conducted online, something that has tended to produce better results for “Leave.”

Any wavering in market confidence as the vote nears could benefit bond investors as companies selling new sterling debt will have to offer wider premiums to get deals done, said Rhys Petheram, a fund manager at Jupiter Fund Management Plc, which has 36.2 billion pounds of assets under management.

“Markets are likely to get more and more jittery the closer we get,” he said. “That is where you might get some opportunities.”

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