UK corporate bond market: European investors increase allocation in pound-denominated UK debt
The pound has depreciated by as much as 15 percent against the euro and 13 percent against the dollar since the Brexit vote.
Taking advantage of the pound’s depreciation against the euro and the dollar since UK decided to leave the European Union, investors from around the world, and particularly Europe, are increasing allocation to non-sovereign pound-denominated UK debt.
Analysts from UK have been quoted saying this is because of the relative value of the currency being higher due to depreciation. The pound has depreciated by as much as 15 percent against the euro and 13 percent against the dollar since the Brexit vote.As a result of this, issuers from around UK have found it easier to sell bonds and borrow money from the market. According to media reports, companies with a rating of investment grade have sold bonds worth over 17 billion pound sterling in 2017 so far, close to thrice the amount they
raised through bonds over the same period last year.
Also, the portion of each issue sold to non-UK investors, which was under 10 percent in 2016, has more than doubled this year, with around 20 percent of some recent issues being sold to non-UK investors.
One of the main reasons for the increased demand for UK bonds in general has been that the UK base rate has remained at 0.25 percent since August last year, two months after the Brexit vote. The idea was to keep interest rate low in order to provide a boost to economic growth in UK, which has now been achieved.
Lower interest rate is always good for the bond market since coupons offered by issuers seem very attractive.
The market has also been supported to some extent by purchases of bonds made by the Bank of England, which bought bonds worth over 10 billion pound sterling between September last year and April this year.
The demand for corporate bonds, however, is not only because of increased participation by investors from around Europe and favourable macro-economic factors, which have admittedly been the primary drivers, but also because of investors from UK moving their money from equity investments to fixed-income ones.
All in all, from a foreign investor’s perspective, these factors bode well for the UK corporate bond market. Investors therefore, will continue to remain interested in pound-denominated debt, at least in the near-term.They have already netted a return of over 2 percent this year on these investments and are expecting more of the same.