Thursday, 5 January 2017
No Brexit panic yet as foreigners buy UK bonds at record pace
Britain's shock vote to leave the European Union has yet to scare off overseas investors, who are snapping up British government bonds at the fastest pace on record, figures on Wednesday showed.
This suggests that foreigners have doubled down on gilts and are taking advantage of the slide in sterling since the June 23 Brexit vote to load up on assets that are now around 20 percent cheaper.
The pound's steep fall is also likely to have forced central banks to buy more British bonds in order to stick to their mandates and keep the sterling weighting of their foreign exchange reserves steady, analysts said.
The BoE figures show, however, that domestic investors are going completely the other way and selling British government bonds at the fastest pace on record.
Overseas investors bought 15.61 billion pounds ($19 billion)of gilts in November last year, the highest for a single month since October the year before, the BoE said.
That brought the rolling three-month total purchases up to 39.43 billion pounds, the highest since BoE records began in 1986, Reuters calculations show.
Domestic investors sold 14.61 billion pounds of gilts, bringing the three-month rolling total sales to 67.68 billion pounds, also the highest since 1986.
"With the currency so cheap, it looks like overseas investors have bought heavily on a non-hedged basis," said Antoine Bouvet, rates strategist at Mizuho Securities in London.
"The slide in sterling helped the stock market move higher, so perhaps there was some reallocation among domestic investors there too," he said.
Britain's benchmark FTSE 100, which derives some 70 percent of its earnings from abroad and therefore benefits from a lower pound, hit its highest ever closing level this week .FTSE.
The Brexit shock initially sent sterling, stocks and gilt yields tumbling, and prompted the BoE to cut interest rates to a new low and revive its bond-buying stimulus programme.
Alan Clarke, UK and euro zone economist at Scotiabank, noted that holdings of gilts at British insurers and pension funds decreased markedly after they started selling gilts to the BoE in 2009.
The latest BoE data showing a big drop in domestic gilt holdings may signal a renewal of this trend, Clarke said, reflecting the BoE expanding its gilt purchases programme by 40 billion pounds in August 2016.
By contrast, some overseas central banks and sovereign wealth funds will have been under pressure to top up sterling portfolios battered by the pound's post-Brexit vote plunge.
"It's a currency effect - gilts are cheaper to buy but also a lot of these overseas investors are mandated to maintain a certain percentage of their portfolios in sterling assets, which means they have been compelled to buy gilts," Clarke said.
While stocks and bond yields have recovered since last June, the pound has remained under the cosh and was the worst-performing major currency in the world last year.
Britain's current account deficit is 5.9 percent of gross domestic product, meaning Britain relies on "the kindness of strangers", in the words of BoE governor Mark Carney, to balance its books.
($1 = 0.8131 pounds)
Reference: Jamie McGeever and Andy Bruce