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'Brexit' would boost UK bonds, JPMorgan asset management says

Monday, March 7, 2016 - 20:47

[EDINBURGH] Holders of the UK's government bonds need not fear the prospect of Britain voting to leave the European Union as they stand to benefit from any economic woes that follow the vote, according to one of the world's largest money managers.

"If a 'Brexit' happened it would be very likely the Bank of England would ease policy again, either by cutting interest rates or more QE, gilts are very much a beneficiary of that," Nicholas Gartside, London-based chief investment officer for fixed-income at JPMorgan Asset Management, which oversees more than US$1.7 trillion, said in an interview on Bloomberg Television's "Countdown" with Anna Edwards. "You also have a scenario where you've got a lot more economic uncertainty. So, again, gilts are a beneficiary of that."

Gilts extended a rally on Monday that has delivered the second-biggest returns among developed nations this year. The pound meanwhile has taken the brunt of investor uneasiness about the possibility of Britain exiting the world's largest trading bloc following the June 23 vote, with its 4 per cent against the dollar this year the worst among 16 major currencies.

The 10-year gilt yield dropped two basis points, or 0.02 per centage point, to 1.47 per cent as of 10:36 am London time. The 2 per cent security due in September 2025 rose 0.14, or 1.40 pounds per 1,000-pound ($1,415) face amount, to 104.695. The yield touched 1.226 per cent on Feb 11, the lowest since Bloomberg began collecting the data in 1989.

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A UK exit is far from certain, with polls showing the outcome is hard to call. Bank of England officials, including Governor Mark Carney, will testify at Parliament's Treasury Committee on Tuesday on the economic and financial costs and benefits of EU membership.

"Gilt yields head probably through 1 per cent" after a UK exit, Gartside said. "We look at the polls at the moment, it's arguably a narrow majority for the "In" camp, and one thing we'll follow is the polls very very closely. The second point is it does feel a long way away until June 23. We're in the phony war stage really, I suspect as we get a lot closer to the 23rd the debate will intensify. What investors should prepare for is a lot more volatility." Britain's sovereign debt returned 4.26 per cent this year through March 4, according to the Bloomberg World Bond Indexes. That's second only to a 4.31 per cent gain in Swiss securities among developed markets.

The pound declined for the first time in six days versus the dollar on Monday, falling 0.6 per cent to $1.4145. It fell 0.2 per cent to 77.47 pence per euro.

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