Halister News

(Bloomberg) -- GBP credit spreads are ~14bps above their long-run average even after BOE announced its corporate bond-buying program, suggesting a Brexit premium still exists, Morgan Stanley analysts Srikanth Sankaran, Max S Blass and Aron Becker write in client note.

• The EUR market traded through its average by the time the ECB’s CSPP was announced
• The average premium GBP offered vs EUR through 2006-16 was ~29bps vs current 66bps; reached a high of 105bps after the Brexit vote
• The premium in GBP market will likely compress further once the BOE’s bond-buying program begins, should the data hold up, barring a more confrontational political approach
• Relative underperformance of GBP’s long end also contrasts with the EUR market’s experience where the strongest impact of the CSPP was felt in the long end; therefore, recommends positioning for flatter curves in GBP credit
• In other recommendations, favors cross-currency switches with a focus on non-financial credits from the same issuer, where the maturities are within two years of each other, and the cross-currency adjusted pick-up is at least 20bps
• Morgan Stanley doesn’t expect any immediate structural shift in sterling bond supply as issuers continue to focus on balance sheet quality; the behavior of continental European issuers suggests cheap funding per se is unlikely to trigger an increase in debt-funded M&A or share buybacks
  • Primary activity likely to be dictated by refinancing requirements and debt “re-profiling” until the post- Brexit landscape becomes clearer