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It Never Happened

01 July 2016 by lberuti

On the eve of the results of the referendum which took place last Thursday in the UK, people were slightly worried that almost no probability of a Brexit appeared to be priced in the credit market. One week on, and maybe it was fully priced in after all… After an initial kneejerk reaction which sent iTraxx Main (ITXEB) to 105bps and iTraxx Crossover to 435bps, both indices are roughly back to the closing levels of the 23rd June at 79bps and 346bps respectively. iTraxx Financials Senior, which was supposed to be most at risk, only suffered marginally more and its risk premium difference with ITXEB has gone from 21bps to 25bps. In credit, it is as if Brexit never happened. Other asset classes do not necessarily tell the same story. Interest rates are at their lowest levels in Europe and in the UK. The British Pound has not been able to stage any sustainable rebound against the USD nor against the Euro and is stuck at its lowest levels in years. It is possible to patch that together if one believe central banks are still almighty. But, if the rationale of credit investors is just that a trick will be found to ignore the result of the referendum, they are probably in for a rude awakening at some later stage during the summer.