Bond markets were taken aback by the outcome of the referendum on EU membership.
It may be the case the impact will be felt more acutely in equity markets, but fixed income investors will be wondering what they can expect to happen to credit markets and how they should be positioned.
Chris Iggo, chief investment officer, fixed income at Axa Investment Managers, observes: “Bond yields are lower because of the flight to safety. In the credit markets, spreads are wider because of the political and economic uncertainty that flows from the vote.”
He is optimistic there will be buying opportunities, though. “Central banks will provide liquidity, rate hikes are off the cards and bonds have better capital preservation characteristics than equities that face an uncertain earnings outlook,” he explains.
In the run-up to the referendum, figures from Thomson Reuters Lipper showed the IA Sterling Strategic Bond sector was one of the worst hit by investors pulling assets from UK funds, recording net outflows of £12bn over the year to the end of May. However, the IA Global Bonds sector was one of four IA sectors to see inflows of more than £1bn across the same period.
Jim Cielinski, global head of fixed income at Columbia Threadneedle, also highlighted that in the aftermath of the result, core government bond yields plunged to record lows, but suggests further declines should be limited.
“The price of so-called safe havens is now extreme,” he adds.
EXPERT VIEW - What next for credit markets?
Pioneer Investments’ head of European fixed income, Tanguy Le Saout, says:
“We expect Brexit will cause a rally in German bunds, accompanied by an underperformance of other markets, but especially peripheral markets such as Italy and Spain.
“A sharp ‘risk-off’ environment, accompanied by widening spreads in peripheral and credit markets could cause central banks to intervene. The central banks’ immediate focus will be on stabilising the markets, and they are ready to provide them with liquidity. We believe that monetary policy adjustments will be made, initially through measures of credit easing and broadening of the asset buy-back programme, but ultimately rate cuts may be implemented.”
But he concedes: “Corporate issuers have become well-accustomed to operating in a low-growth, weak-revenue environment; for such companies, it will be the extent of economic weakness that matters most. Our central case is for slow growth, no credit improvement but no sharp rise in defaults.”
Mr Cielinski states: “Demand for income remains and this will support spread markets, as will a policy response that provides a ‘back stop’ and cushions losses in corporate bonds – such as corporate bond purchases, for example. We remain modestly constructive on corporate credit.”
Among the immediate responses from fixed income managers, there is speculation that the European Central Bank’s (ECB) quantitative easing programme will give the continent’s bonds an edge.