Pimco’s Three Trades to Shield Against Brexit-Driven Volatility

  • Investor says pound may fall 10% vs dollar if U.K. leaves EU
  • Exit likely to boost gilts, bank bonds on rate cut: Mike Amey

Pacific Investment Management Co. recommends selling the pound as a hedge against the risk of a Brexit following the June 23 referendum on membership of the European Union.

London-based money manager Mike Amey also recommends holding U.K. government bonds with maturities of five to 10 years and bank debt to hedge against quitting on the basis that the Bank of England might have to lower interest rates to counter the threat to the economy. Pimco, which manages $1.5 trillion, estimates there’s a 40 percent chance of Britain leaving the EU. 

For “portfolios with less liquid U.K. assets, or with significant exposure to U.K. banks,” selling the pound against the dollar is probably the “best way to hedge,” Amey wrote in a May 24 note, forecasting a drop of 10 percent on a “leave” vote.

Sterling has whittled its year-to-date decline to less than 1 percent amid signs the “remain” campaign is gaining ground and was up 0.8 percent on the day at $1.4603 as of 1:05 p.m. London time. It gained 1.2 percent to 76.50 pence per euro, touching the strongest level since Feb. 4.

Gilts due in five and 10 years provide “good risk-reward” characteristics, according to Amey, who sees a very small probability of a BOE rate increase in the next year, irrespective of the referendum outcome. A Brexit, on the other hand, would prompt a cut in the main rate to zero, he said, “potentially boosting gilt prices.”

The underperformance of U.K. bank bonds also provides an “opportunity,” Amey said, adding that “the uncertainty of the U.K.’s trade outlook is counterbalanced by the positive impact of sterling weakness on overseas earnings.”

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