Pound Headed to Brexit Lows for BlueBay as U.K. Reaches Crisis Point

(Bloomberg) -- The U.K. has reached a crisis point and the pound is heading back toward its lowest levels since the Brexit vote, according to BlueBay Asset Management LLP.

A second Brexit referendum now seems the most likely outcome after Prime Minister Theresa May delayed Parliament’s vote on her divorce deal, according to the asset manager. The European Union is unlikely to offer the U.K. any more concessions and may start no-deal preparations at a summit Thursday, said portfolio manager Mark Bathgate, who is shorting both the pound and gilts.

“We are now at a crisis point -- the U.K. is now in a very difficult situation where it’s legislated a hard Brexit and can’t get the deal with the EU approved,” Bathgate said. “The pound is headed back to late 2016 lows.”

The pound fell as low as $1.1841 in October 2016, the weakest since 1985. That “flash crash” move came amid thin liquidity in Asian trading. Sterling slid on Monday toward $1.25, the lowest since April 2017, while 30-year gilts led debt gains as investors sought the safety of longer-dated bonds.

Faced with the impossibility of getting the current Brexit plan past lawmakers, May will need to get fresh concessions from the EU to convince skeptical lawmakers, or face their threats of a no-confidence motion or a push for a second referendum.

Even though U.K. government bonds have rallied on the uncertainty, BlueBay sees factors including higher currency inflation and a slower economy weighing on the debt in the medium term.

To contact the reporter on this story: Charlotte Ryan in London at cryan147@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee

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