Pioneer Cuts Pound Bonds as It Buys Default Swaps on Brexit

Brexit uncertainties have prompted Pioneer Investments’ European fixed-income team to cut holdings of sterling bonds and buy protection on U.K.-related debt.

The money manager, which boosted assets 11 percent last year, substantially reduced its holdings of sterling corporate debt in recent months, according to Suzanne Keane, co-head of credit research. It also bought credit-default swaps insuring the notes of some companies with links to the U.K.’s consumer and utility industries, Keane said.

Investors are girding for market volatility as the June 23 referendum on staying in the EU approaches. Polls suggest the result will be close and the Bank of England said the uncertainty is weighing on the borrowing plans of large companies.

“We’ve reduced our sterling bond exposure on the expectation of a further reduction in liquidity and increased spread volatility in the run-up to the referendum,” said Dublin-based Keane. The company bought the default swaps to benefit from “potential spread widening" associated with Brexit risks, she said in e-mailed comments.

The prospect of a U.K. exit from the EU is being flagged by companies as a potential risk for buyers of their bonds. Lenders from EU nations that bought bonds backed by certain U.K. assets may find themselves caught in the fallout of a Brexit because the debt may no longer count toward emergency cash reserves, lawyers at DLA Piper have said.

The extra yield investors get over benchmark rates for holding highly rated sterling bonds is 204 basis points, while the premium for similar euro debt is 93 basis points, according to Bank of America Merrill Lynch index data. The difference between the two has widened from 77 basis points this year.  Even so, bonds sold in both currencies have returned 2.8 percent this year, the indexes show.

The industries that will most quickly feel the impact of a Brexit include banking because of regulatory and operational challenges, Keane said.

Pioneer, which is headquartered in Milan, boosted assets under management to 224 billion euros ($255 billion) at the end of 2015 from 201 billion euros a year earlier, according to its website.

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