British companies are facing persistently difficult financing conditions in their home market while borrowing costs are dropping in Europe and the US — cementing the country as an outlier among the world’s largest economies.
(Bloomberg) — British companies are facing persistently difficult financing conditions in their home market while borrowing costs are dropping in Europe and the US — cementing the country as an outlier among the world’s largest economies.
As the UK struggles more than most to get inflation under control, the yield gap between an index of investment grade sterling corporate bonds and its euro equivalent is near the widest this year. The spread of the sterling index — predominantly made up of British firms — and a similar US index reached the widest since October this week.
It’s another sign that investors remain pessimistic about the UK, and see more work ahead for the Bank of England — even after it raised its benchmark rate to the highest since 2008. Data on Friday showed the UK economy shrank unexpectedly in March, leaving it with the worst gross domestic product of the Group of Seven nations since the pandemic.
“The difference in yield versus euros has been creeping up again lately,” said Shanawaz Bhimji, head of corporate bond research at ABN Amro Bank NV. “Base rates in the UK will likely stay higher for longer. Stagflation is making the case for a rate cut difficult,” he said.
Sticky double-digit inflation in the UK stands in contrast to the euro area and US, which have both seen consumer price rises moderate over the past few months. That’s spurred optimism that the European Central Bank and US Federal Reserve may be able to finish their rate hike programs sooner than the UK — underpinning sterling’s outperformance against all other major currencies this year.
The higher cost to borrow in sterling — with yields on the sterling index at 5.7%, compared with 4.1% on the euro equivalent — is also deterring companies from selling new debt.
Just £7.9 billion ($9.9 billion) of sterling corporate bonds have been sold this year, the lowest level for this point in the year since 2018, according to data compiled by Bloomberg.
And while Europe’s primary market roared back to life this week, with more than €14 billion in euro corporate bond sales, there was just one deal in the sterling market — a £250 million offering from utility Vattenfall AB.
“There generally is a wider buyer base in Europe and it becomes a bit of a self-fulfilling cycle as issuance drops in sterling,” said Gordon Shannon, a portfolio manager at TwentyFour Asset Management LLP. “The expectation of lower liquidity drives supply further to Europe,” he said, referring to companies choosing to issue bonds in euros over sterling.
Last month, British hotel chain Travelodge partly refinanced its sterling debt in euros, issuing a £330 million and a €250 million note to take advantage of better demand in euros.
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