The weakness in the pound has spurred greater demand from foreign investors for UK debt securities, with “sterling tourists” hailing mainly from Europe, helping British companies sell bonds.
The trend is a sign of how the dramatic depreciation in the pound since the UK voted to leave the EU has rippled across the country’s financial markets, with sales of sterling-denominated debt running at a much faster pace than last year.
UK companies have dramatically increased their borrowing in sterling compared to 2016, when concerns over the EU referendum stymied issuance. Companies rated investment grade have sold £17.3bn of bonds so far in 2017, compared to £6.2bn over the same period last year, according to Lloyds data.
“When sterling’s weaker, everything looks optically better value in your natural currency,” said Keval Shah, head of bond syndicate at Lloyds. “We certainly have enjoyed that effect, because investors who are non-UK have been travelling in sterling.”
He added: “If it’s international money, they might take a slightly larger allocation to sterling, just because of the relative value of the currency.’’
The pound remains 15 per cent weaker against the euro and has eased 13 per cent versus the US dollar since the referendum.
Corporate bond markets in the UK have been supported by £10bn of purchases from the Bank of England, which ran from September to April. Non-gilt sterling bonds have generated a total return of 2.2 per cent so far this year, according to a Bank of America Merrill Lynch index.
Bankers at NatWest say that foreign allocations on deals have risen sharply so far this year, with increased participation from European investors.
From January to June last year, 92 per cent of sterling bonds on deals that NatWest worked on were allocated to UK investors, with only 8 per cent going to the rest of Europe. In 2017 so far that proportion has more than doubled, with 19 per cent of deals going to European investors.
Peter Mason, co-head of European Financial Institutions Group at Barclays, pointed to a spate of deals from UK banks and financial institutions over the past month despite the general election in June resulting in a minority Conservative government.
“In addition to Brexit, the market thought the election may have a material impact on capital market access,” said Mr Mason. “What’s probably surprised people to the upside is how constructive it seems — investors remain in on the UK story by and large.”
Skipton Building Society last week sold a £350m bond of which only 81 per cent was distributed into the UK and Ireland, according to Barclays, while 9 per cent of the deal was sold into Switzerland and 6 per cent into Nordic investors, with the remaining 4 per cent sold elsewhere.
Mr Shah highlighted an additional driver boosting sterling demand, suggesting that while international investors are willing to take larger allocations due to the currency effect, other inflows for bond issuers come from investors “moving out of equity into fixed income”.
“They’ve become more defensive on the UK,” he said. “If they’ve got a sterling strategy, it might be a reallocation to fixed income from equities in sterling.”