UK credit markets have reached a new milestone: bond spreads are back to levels before Liz Truss’s disastrous run as prime minister.
(Bloomberg) — UK credit markets have reached a new milestone: bond spreads are back to levels before Liz Truss’s disastrous run as prime minister.
It’s part of a broad recovery in UK assets on optimism that Britain is on track to build better ties with the European Union and the energy crisis will abate. The spread between sterling- and euro-denominated junk debt is the narrowest since July. Blue-chip British companies have seen debt yields converge with euro counterparts this year.
A few international issuers have also tapped the sterling market to raise money, including Ford Motor Credit LLC last month. That’s a vote of confidence after the turmoil of late 2022, when Truss’s plan for large unfunded tax cuts sowed turmoil in the bond market and forced liability-driven pension funds to dump assets.
“Sterling credit is in slow recovery following the bad dream of the mini budget and the LDI crisis,” said Hugo Squire, a high-yield portfolio manager at Schroders Investment Management Ltd. in London.
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In terms of borrowing costs, sterling junk bonds yield an average of 9.56%. That’s about 250 basis points below the mid-October peak. It’s a similar picture for sterling investment-grade bonds, which are near the lowest level against euro peers since July, according to a Bloomberg index.
Another reason spreads have narrowed is that traders are pricing in a lower peak for UK interest rates. Bank of England Governor Andrew Bailey pushed back against hawkish expectations this week, saying “nothing is decided.”
The gap between sterling junk bonds and benchmark gilts is near the tightest level since June.
“We think spreads will be tighter by year end as the BOE will hike less than the current terminal rate priced,” said Kamil Amin, macro strategist and head of EU credit at UBS Group AG.
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