Brexit

There has been a lot of focus on the performance of the high yield markets since the start of the year, particularly in Q1 when many rates markets were selling off aggressively.

Having been at the heart of the GFC and then contributing to the Eurozone sovereign crisis, we have long argued the European banking sector would have to prove its newfound resilience to investors by successfully navigating a challenging period.

In our view the rationale for the premium is certainly weakening and, of course, we can no longer call it a ‘Brexit’ premium.

One topic that is beginning to gather headlines again is the terms of any bilateral agreement between the UK and European Union once Brexit is finally completed at the end of this year, with the latest round of negotiations breaking up a day early this week as both sides said they were still far apart on a number of issues.

It is not clear to us just how much more monetary easing will placate equity investors, and we see a real risk that when we enter the third quarter earnings season next week, company specific data from the bottom up will be more of a shock than the macro picture has been.

The UK’s political situation, and in particular the harder Brexit stance of the frontrunner for next prime minister, Boris Johnson, has provided the market with a steady stream of headlines over the past few weeks. As a direct consequence sterling is close to 6% off recent highs and domestic credit spreads have also underperformed their European and US peers.

This year has been a big one for sterling bond supply, especially in the ABS market. With the end of the Bank of England’s Term Funding Scheme and the comeback of traditional bank issuers, UK issuance volume year-to-date has totalled €25bn from 38 deals placed across different asset classes.

On Sunday Lewis Hamilton begins his quest for a 5th Formula One World Championship.

Ever since the result of the Brexit referendum we have seen a premium on £ credit spreads, and we have thought it worthwhile trying to exploit this premium – in a measured way.