Sterling is looking more European than ever
It is a neat irony that, following the UK’s vote to leave Europe, the sterling bond market is starting to look more and more European.
Six corporate and financial borrowers sought to take advantage of strong funding in the sterling market this week, after Bank of England governor Mark Carney created a buzz with his introduction of four Draghi-esque stimulus measures last Thursday.
Despite the uncommon rush of supply, deals have looked bulkier than ever. HSBC, for example, raised £1bn on Monday, with orders for the bonds topping £2.1bn.
Once upon a time, a large sterling deal would have been half that size and issuers would have been flattered to have many excess orders at all. But squinting at the currency symbols this week, you might have been forgiven for thinking HSBC’s trades had been in euros, or even dollars.
Whether these primary market dynamics are here to stay is difficult to call, but the Europeanisation of sterling bonds will no doubt continue to play out across secondary markets.
Foreign buyers are returning to the currency, which will eventually send spreads grinding tighter. Couple that with the now well-documented tightening effects of corporate QE and, pretty soon, what little extra yield sterling bonds had to offer will disappear.
Many corporate and financial issuers are already trading flat to their euro curves, while yields on some UK government debt turned negative for the first time this week.
UK voters may have rejected an ever closer union with Europe on June 23 but, in the fallout of the leave vote, the kinship between sterling and euro bond markets has never been stronger.