Fixed Income Opportunities Post-Brexit | Mackenzie Investments

Manager Videos

2016 Q3 Outlook

Fixed Income Opportunities Post-Brexit

Market instability following the Brexit vote has led central banks to respond with strong rhetoric. Steve Locke, Lead of the Mackenzie Fixed Income Team, details the market’s reaction to Brexit and his approach for Q3.

Fixed Income Opportunities Post-Brexit

Steve Locke, Lead of the Mackenzie Fixed Income Team, outlines the recent performance of his products and his position for Q3.

Show transcript

Well, Central Banks have had to react strongly with rhetoric in the wake of the Brexit vote because of the instability in markets that that brings.  So, right off the bat, the Swiss National Bank wanted to stop the Swissie from rising and so intervened in the FX market. The Bank of England has offered three potential policy measures: A rate cut, a central lending facility for U.K. banks, as well as a Rollback of some of the capital rules they were going to introduce for the U.K. banks coming.  And, even the Fed mentioned the open swap lines it has with other Central Banks to help support the liquidity around markets post Brexit. 

Well, government yields reacted quite strongly post the Brexit vote.  And, what we've seen at quarter-end is really a continuation of some of the movement we've seen through the early part of the spring, to lower yields.  Obviously, in a flight-to quality-type of trade that we see around markets, that often pushes us to lower yields.  And, as well, the threat of potential intervention or need for more intervention by Central Banks will lower yields, as well.  So, we ended the quarter with a record low approximately in the U.K. 10-year.  A close to a record low in the German 10-year as well as approaching the record low in the U.S. and Canadian 10-year yields.

Corporate bonds have actually been relatively well-behaved in the wake of the Brexit vote.  What we've seen is a little bit of initial spread widening around that vote and that's a sign of risk-off around corporate credit.  But, quickly markets rebounded.  As we went through the last week of June, we saw those spreads tighten back in recovering some of the value that had been lost in the immediate hours to a day or two after the vote.  In the wake of that, we ended the first half of 2016 with a very strong return for high-yield markets, including 9.3% on the U.S. high-yield index.

Well, we're positioning our portfolio to take advantage of what we still think are some cheap areas of corporate credit.  So, the Brexit vote obviously introduces new risks and uncertainties as we look forward over the medium term, but as we know, it's going to take a little while for those things to play out through the political processes in Europe.  In the meantime, we have good carry and good extra yield available from corporate markets including investment-grade corporate bond market.  And, we also still like the loan market slightly more than the high-yield market today for a good risk-adjusted return.  So, we're overweight in those parts of our portfolio and a little bit underweight in the government side.  With the yields having come down so much in government markets, we're a little bit shy on duration as we end Q2.

Key Points:

  • Central Banks have had to react strongly in the wake of the Brexit.
  • We are positioning our portfolio to take advantage of attractively priced areas of corporate credit.
  • We expect the global economy to remain very sensitive to increasing bond yields, which will contribute to the continued low yield environment we have seen in recent years. 

For more of our Q3 outlook, please read the July issue of Mackenzie Express.