Booze and tobacco boost post-Brexit UK bond market

Added 1st July 2016

The success of Brown-Forman’s and British American Tobacco’s (BAT) sterling bond issuance Thursday proves investors are still jonesing for quality UK bonds, said Chris Bowie, portfolio manager at TwentyFour Asset Management.

Booze and tobacco boost post-Brexit UK bond market

The makers of Lucky Strike, British American Tobacco, and Jack Daniels owner Brown-Forman reopened the UK bond market Thursday, putting a stop to a month long dry spell of corporate debt issuance.

BAT issued five-year sterling notes worth £500m ($670m, €603m) with a yield 130 basis points above gilts. “Very healthy for such an unhealthy habit,” Bowie remarked.

Brown-Forman sold £300m of 12-year securities at 150 basis points above gilts. 

While both sterling bond deals are something of a post-Brexit milestone, they are also an indication that “things have gotten so bad, the markets have returned to the old vices of booze and fags,” said Bowie.

Vice or not, Bowie asserted these deals are fantastic news for the sterling market and validation against the naysayers who predicted the UK bond market would be stagnant for much longer than the euro and dollar markets. 

“They prove that the UK bond market is still open for business, we still have strong client demand for good quality bonds (even at low sovereign yields), and that for consumer staples at least, investors are willing to take a view through the likely volatility we might see over the coming months until we have more clarity on the EU negotiations,” he said.

TwentyFour could not resist the lure of BAT’s proposition but was more reticent about the yield potential of the Brown-Forman deal, Bowie revealed.

“The 5yr part of the curve is more attractive to us right now for two reasons; firstly we think any rate cut expectations following Brexit will be more likely to lead to yield falls in that part of the curve, and secondly the duration profile of the 5yr gives a good trade-off between the yield you will receive and the low potential for capital losses,” Bowie stated.

“By contrast, and as enjoyable as a Jack Daniels is, for a 12yr bond we’d need to see a lot more spread to improve its breakeven potential to protect that investment from potential losses. A splash of coke with the Jack Daniels if you will,” he remarked. 

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