Shock waves ripple through credit markets after U.K. Brexit vote

London: Shock waves reverberated through credit markets after the U.K. voted to quit the European Union. Measures of risk for corporate bonds and money markets surged on Friday. The Markit iTraxx Europe Index of credit-default swaps insuring investment-grade corporate bonds rose by the most since 2007, according to prices compiled by Bloomberg.
A gauge of where bank borrowing costs will be in the months ahead, known as the FRA/OIS spread, hit the most extreme level since 2012. Britain’s decision took investors by surprise after financial markets had priced in a vote to remain in the 28-nation bloc and polls showed it was too close to call.
The Bank of England said on Friday it will take all necessary steps to ensure stability, while central banks across the world pledged to take action as needed to avert any breakdown in financial-market liquidity. "Liquidity will be a big issue,” said Andrew Lake, the London-based head of fixed income at Mirabaud Asset Management which oversees about 8.5 billion Swiss francs ($8.7 billion). "The market got a bit ahead of itself yesterday thinking it was going to be a Remain.
That was a risk given the polls were quite close.” Stress Indicators The investment-grade derivatives index jumped 21 basis points to 97 basis points as of 7:38 a.m. in London, according to data compiled by Bloomberg. T
he three-month FRA/OIS spread widened to 0.31 percentage point, compared with 0.27 on Thursday. The measure indicates where traders expect the gap between the three-month dollar London interbank offered rate, or Libor, and the fed funds effective rate -- dubbed Libor/OIS -- will be in the future. More than $5.6 billion of protection on the investment-grade benchmark changed hands on Friday, exceeding an average full day, Bloomberg data show. Traders bought and sold $41 billion of swaps on the index so far this week.
"My biggest concern is what the second-order effect will be,” said Leroy Tujeehut, a Amsterdam-based portfolio manager at Delta Lloyd Asset Management, which overseas 54 billion euros ($59 billion).
"The risky assets in continental Europe are the subordinated financials or additional Tier 1 bonds in weaker regions,” he said, referring to the riskiest form of bank debt. Bond Risk The Markit iTraxx Europe Senior Financial Index of credit-default swaps on banks and insurers climbed 31 basis points to 126 basis points, also the biggest increase since 2007, according to data compiled by Bloomberg.
The subordinated benchmark rose 80 basis points to 285, the biggest jump since 2014, the data show. The Markit iTraxx Asia Index of credit default swaps increased 20 basis points to 155 basis points as of 1:34 p.m. in Hong Kong, according to pricing from Westpac Banking Corp. The gauge is set to close at its highest level since March, based on pricing from data provider CMA. "I ascribe the panicked look to markets this morning to Asia just not anticipating the possibility a Brexit vote could happen,” Bill Blain, a strategist at brokerage Mint Partners in London wrote in a note to investors. "Yesterday, they were told Remain were a sure fire winner.”