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According to analysts from Danske Bank, Brexit could trigger a downgrade in UK sovereign rating but might not necessarily change foreign investors’s appetite for Gilts dramatically.
“The upcoming EU referendum on 23 June represents a significant medium- to long-term risk factor for the UK economy and, for this reason, economic data releases will stand in the background in coming months.”
“We see little evidence of Brexit risk premium priced in the Gilt market and, in our view, Brexit concerns are primarily a theme for the FX market. Indeed, the UK is on negative watch by Standard & Poor’s and we believe a Brexit would be likely to trigger a downgrade of its sovereign rating.”
“However, this might not necessarily change foreign investors’ appetite for Gilts drastically. In our view, the Bank of England’s hands are more or less tied ahead of the EU referendum and we expect UK money market rates to remain fairly stable near term.”
“We hold the view that the recent more dovish stance from central banks globally is likely to remain very supportive for global fixed income markets. We have thus lowered our 1-12M UK interest-rate swap forecasts some 15-25bp on the 5-10Y tenors, projecting lower rates at the long end of the curve, driven by lower global rates in the coming months.”
“We expect a flat development in the 0-2Y segment in the coming one to three months. Longer term, we still forecast higher UK interest rates over the medium-term horizon driven by Bank of England rate increases and higher US interest rates. We now forecast the five-year UK swap rate at 1.70% in 12M (revised down from 1.75%) and our 6M and 12M yield forecasts are above the forward market across the curve.”
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