Halister News

(Bloomberg) -- With the U.K. referendum less than eight weeks away, the GBP corporate credit market has been resilient, showing no sign of the volatility that put the currency on a downward path in recent months, Bloomberg strategist Simon Ballard writes.

• Global macroeconomic backdrop and interest rate outlook continue to fuel investor demand for yield creating fillip for risk assets; solid credit fundamentals outweigh immediate Brexit concerns
• Secondary GBP corp credit spreads, in line with global risk assets, have performed strongly in last couple of months rallying from February wides
• Still, low level of GBP primary market activity year-to-date may highlight some investor caution toward Brexit risk
  • GBP corp new issuance GBP2.44b ytd, of which GBP1.29b in last week; -66% vs GBP7.1b in same period 2015: data compiled by Bloomberg
  • GBP corp new issuance in past week has been more encouraging
• On a relative basis, GBP corp credit has underperformed EUR corporate credit spread tightening from Feb. wides, but EUR IG and HY spreads have had added benefit of imminent ECB corp bond buying program (CSPP); EUR IG credit index snapped ~16bps tighter in immediate wake of CSPP announcement on March 10
  • GBP IG credit ~-26% from February wides; GBP HY credit ~-19%, according to Bloomberg data
  • EUR IG credit has rallied ~37% from February wide; EUR HY ~-32%
• GBP credit mkt sentiment may become more susceptible to referendum headlines as vote approaches if debate becomes more intense about potential economic consequences of a Brexit
  • GBP primary market volumes ahead of June vote may be indicator of generic GBP risk appetite; any renewed weakness in currency could also be precursor to risk aversion and potential spread re-widening, with moves exacerbated if U.K. votes to leave the EU
  • GBP HY may be most at risk from specter of Brexit vote if non-traditional investors who have sought outsized returns in GBP corp bonds reduce exposure
  • Vote to remain may see spreads tighten further in short- term relief rally

• NOTE: Simon Ballard is a credit strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice.