Corporate bond risk surges on Brexit vote

The union flag flies over the Houses of Parliament in Westminster, in central London, Britain, on June 24.
The union flag flies over the Houses of Parliament in Westminster, in central London, Britain, on June 24. PHOTO: REUTERS

LONDON • Corporate bond risk surged yesterday after the United Kingdom voted to give up membership of the European Union.

The cost of insuring investment- grade corporate bonds in Europe rose by the most since 2007, with the Markit iTraxx Europe Index jumping 21 basis points to 96 basis points as of 6.45am in London, prices compiled by Bloomberg show.

The Markit iTraxx Europe Senior Financial Index of credit-default swaps on banks and insurers jumped 32 basis points to 128 basis points, also the biggest increase in almost nine years, the data shows.

The decision sent shock waves through financial markets despite recent polls showing the Leave campaign had pulled ahead.

Central banks, including the US Federal Reserve and the Bank of Japan, had joined the Bank of England in warning about disruptions to the global economy if Britain opted to depart the 28-nation bloc.

"My biggest concern is what the second-order effect will be," said Amsterdam-based portfolio manager Leroy Tujeehut at Delta Lloyd Asset Management, which oversees €54 billion (S$81 billion). "The risky assets in continental Europe are the subordinated financials or additional Tier 1 bonds in weaker regions," he said, referring to the riskiest form of bank debt.

More than US$2.8 billion (S$3.8 billion) of protection on the investment-grade benchmark changed hands yesterday, almost half of an average full day, Bloomberg data shows. Traders bought and sold US$38 billion of swaps on the index so far this week, the data show.

Asian credit risk also soared, with the Markit iTraxx Asia index of credit default swaps rising 20 basis points to 155 basis points as at 1.34pm in Hong Kong, according to pricing from Westpac Banking Corp. The gauge is set to close at its highest level since March, based on pricing from data provider CMA.

"I ascribe the panicked look to markets this morning to Asia just not anticipating the possibility a Brexit vote could happen," strategist Bill Blain at brokerage Mint Partners in London wrote in a note to investors. On Thursday, "they were told Remain were a sure-fire winner".

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A version of this article appeared in the print edition of The Straits Times on June 25, 2016, with the headline 'Corporate bond risk surges on Brexit vote'. Print Edition | Subscribe