Brexit impact on fixed income — Opportunity?

Several asset managers have shared their views on bond markets after the Brexit vote, and they see buying opportunities in some fixed income assets.

Iggo, CIO Fixed Income at AXA Investment Managers

Bond returns are driven by changes in the term structure of interest rates and by changes in credit risk premiums. The latter are affected by the general business climate and leverage, so there is likely to be some pressure on corporate bond spreads from the downgrading of growth.

This is most likely to affect high yield markets where there is more leverage and more sensitivity to the economic cycle than is the case in investment grade.

However, I am more inclined to see this as a buying opportunity.

My sense is there is a lot of cash in portfolios and waiting around to see what the terms of the UK’s disengagement with Europe and what that means for the economy is too much of an opportunity cost if yields go higher.

Howard Cunningham, Fixed Income portfolio manager at Newton Investment Management

The leave result is likely to be supportive of shorter dated gilts as activity slows and the prospect of interest rate increases recedes even further into the future. The gilt curve may steepen as investors demand more compensation for the longer term uncertainties, but overall yields should not necessarily be higher.

It is worth bearing in mind that, to the extent investors initially view the leave vote negatively and want to dump sterling assets, we doubt gilts will be top of their sell lists.

Sterling corporate bonds face conflicting forces and greater uncertainty may ultimately lead to risk premia, i.e. higher credit spreads (particularly for UK domiciled issuers).

It is important to point out that with yields on euro denominated bonds already low, sterling corporate bond yields might look more attractive. Particularly if, as we expect, ECB intervention has unintended negative effects on liquidity in the euro corporate bond market.

Alejandro Hardziej, Fixed Income analyst at Julius Baer

Post Brexit reactions showed no major and generalised weakness in emerging market (EM) bonds.

In Latin America, spreads widened by 22 basis points, to 503bps, a rather muted effect compared to the impact seen across global financial markets, particularly in Europe.

Latin America has no material direct exposure to the UK, both at country (trade relationships) and corporate (revenue generation) level. Most of these issuers also have little to no revenues or debt denominated in GBP, leaving them practically unaffected by the large swings in the latter.

We believe that the effects of European political events would be mostly indirect and through a potentially stronger USD and weaker commodity prices, although reaction in that sense has been rather muted as well.

Jim Leaviss, head of Retail Fixed Income at M&G Investments

The sell-off in risk assets (after the Brexit vote) presents some opportunities for long term investors.

Credit markets were already discounting a much higher level of defaults than we believed likely, and [Friday’s moves increased] the over-compensation for default risk.

However, with liquidity likely to be low […] the chance to pick up bargains might be limited.


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