Bank bonds plummet as UK walks away from EU: Reuters

LONDON, June 24 (IFR) – UK bank bonds were hit hard in secondary markets on Friday following the nation’s vote to leave the European Union, storing up a period of huge uncertainty for the sector.

UK Additional Tier 1 bonds, the riskiest type of bank debt, fell by up to 8 points while peripheral banks’ Additional Tier 1 prices lost up to 10 points.

Tier 2 and senior debt has also sold off heavily, with Tier 2 debt up to 100bp wider while a Barclays 1.5bn senior bond due March 2021 widened around 75bp to swaps plus 218bp, though spreads have recovered since.

The moves were mirrored in broader financial indices. The iTraxx FinSub index was 67.75bp wider at 261.4bp by 10.30am on Friday while the FinSen index was 28.7bp wider at 121.8bp.

“Clearly the story is one of surprise, of risk-off. I expected significant moves on the day. They will obviously settle down, but there is a large level of uncertainty for the UK, Europe and broader markets overall,” said one commentator.

“We’d expect to see further pressure for risk premia for UK banks, and any banks that have a relation to the periphery.”

The result came as a shock to many in the market which appeared to price in a “Remain” outcome in recent days. The primary market for financial institutions is expected to be shut, though for how long is unclear.

“I expect it to be a period of consolidation, but issuers will adjust eventually just like they did in 2008/2009 and 2011/2012. We’ve been through crisis before and people will adapt,” said a syndicate banker.

“I suspect any reopening will be oriented towards the US. There will be a higher degree of receptivity there. We need clarity and for the markets to find a clearing level, which will take more than a week.”

BACKSTOP

The market, however, appeared sanguine towards UK bank liquidity. UK banks made limited use of additional liquidity from the Bank of England last week and have issued around 46bn-equivalent in the sterling, euro and dollar markets year-to-date, according to IFR data

“There was a lot of uncertainty around Brexit and you always plan for the worst. Banks have done a lot of good business in the first half of the year, and got themselves quite advanced,” said a FIG DCM banker.

The Bank of England’s governor Mark Carney said on Friday that the central bank was ready to provide £250bn of additional funds to support financial markets. It will consider whether to take additional policy responses in the coming weeks.

It is now key that policy makers keep the currency under control, said one investor.

“The Bank of England statement helped to stabilise bank shares, though clearly there are fears about lower growth and the impact on asset quality. Funding spreads for banks will go up, but liquidity is there and cost will feed into P&Ls only gradually.” (Reporting by Alice Gledhill, editing by Sudip Roy, Helene Durand)