Johnson Victory Leaves Brexit Clouds Hanging Over Pound Credit

(Bloomberg) -- Boris Johnson’s victory in the race to be the U.K.’s next prime minister may do little to spur sterling corporate notes still mired in Brexit uncertainty.

Pound corporate and bank notes were little changed after Johnson was named as leader of the ruling Conservative Party on Tuesday, following a landslide win over rival Jeremy Hunt. He reiterated a pledge to pull the U.K. out of the European Union on Oct. 31 after his widely expected win in a ballot of party members.

“With Boris Johnson, there is a higher likelihood of a hard Brexit, but we’ll have to wait and see -- it’s hard to price that kind of risk,” Paola Binns, a portfolio manager at Royal London Asset Management, said before the results announcement.

Sterling bonds have been a laggard in this year’s global credit rally, partly because of concerns about potential disruptions to U.K. trade following the country’s EU departure, particularly in the event of a disruptive no-deal Brexit. Investors are also worried about a possible general election, which could open the door to nationalizations under a Labour Party government.

“The two main risks the market worries about are a No-Deal Brexit and a general election,” said Chris Jeffery, a strategist in the asset allocation team at Legal & General Investment Management. “The leadership election will not radically change either risk.”

Bonds sold by Heathrow Airport, the largest domestic issuer of sterling corporate notes, barely moved after the Johnson announcement. Long-dated bonds, including U.K. university debt, moved in tandem with small swings in government gilts.

Sterling bond spreads have tightened to 141 basis points on Monday, from a year-to-date high of 181 basis points in January, based on a Bloomberg Barclays index. By contrast, euro spreads have narrowed 58 basis points to 104 basis points and dollar ones are down 46 basis points at 111 basis points.

To contact the reporters on this story: Tasos Vossos in London at tvossos@bloomberg.net;Alice Gledhill in London at agledhill@bloomberg.net

To contact the editors responsible for this story: Hannah Benjamin at hbenjamin1@bloomberg.net, Neil Denslow

©2019 Bloomberg L.P.