Brexit may trigger flight to safe-haven bonds

Given the shock result of the EU referendum, there’s a good chance investors will enter into a risk-off mode and seek safe-haven assets at the expense of equities and non-investment grade corporate debt.

David Zahn, head of European fixed income at Franklin Templeton, said he expects a move into less risky assets, such as UK and German government bonds (gilts and bunds).

Other European sovereign bonds viewed as being less safe could suffer. Zahn predicts that those Eurozone countries on the periphery will see their spreads widen due uncertainty across the region.

Steven Oh, global head of credit and fixed income at PineBridge Investments, has similar views. He said that US treasuries and German sovereigns will initially benefit from the result – but that riskier corporate debt will likely see wider spreads, including in the UK.

While gilts might look attractive in the aftermath of the referendum result, an economics academic at Durham University Business School, Nikos Paltalidis, thinks gilt prices will rise, at least in the shorter term, with “painful” effects for the UK economy.

Ratings agency Moodys has said that given the heightened level of uncertainty due to Brexit, it will be “credit negative” for UK sovereign and related entities.

Moody’s went on to say that these entities include non-financial corporate sector debt, car-makers, manufacturers and food producers whose credit rating could be affected by potentially higher trade barriers and reduced volumes.

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