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With Brexit uncertainty having ratcheted up a number of notches since Prime Minister Boris Johnson sought to prorogue parliament, yet again investor attention is focused on what impact a hard Brexit could have on sterling assets, and how to best protect themselves from associated volatility. Since the Brexit referendum in 2016, our view has been that safely capturing the ‘Brexit premium’ priced into many sterling assets was a way to enhance value for investors. However, we have always had a cautious view on what Brexit could ultimately look like, and currently it seems clear that the chance of a hard Brexit has increased significantly.

Yesterday, the Queen approved a request from the Prime Minister, Boris Johnson (‘Bojo’), to suspend Parliament from 10th September to 14th October. This means that when MPs return from summer recess next Tuesday, they could have as few as four days sitting in Parliament before it is suspended again. The Government have argued that this is following procedure – on average a Parliamentary session lasts a year and then is suspended before a Queen’s speech begins a new session – the current parliamentary session has lasted two years. A new session allows the Government to outline its agenda, as well as resetting quotas for certain mechanisms such as Private Members’ Bills.

The European Central Bank faces quite a conundrum ahead of its upcoming monetary policy meeting on September 12. ECB President, Mario Draghi, has clearly signalled that a cut to the refinancing rate (currently at minus 40bp) is likely and markets are now pricing this in with an 85% probability. The problem is, the ECB has also signalled that it will simultaneously consider tiering the bank reserves this rate actually applies to.

The average yield of the bond market today is 1.46%, while its average duration is 7.05 years, going by the widely used proxy of the Barclays Multiverse Index.

Rates risk is not something we concern ourselves with too much in the European ABS market, so normally news of inverted yield curves and 30-year US Treasury yields dropping below 2% would largely wash over us. This is because pretty much all ABS bonds are floating rate, so there is no duration. Or is there?

Today marked the arrival of a long expected event, namely the inversion of the US yield curve between two and 10 years. This is an important event as historically it has been a very reliable indicator of impending recession. History tells us that once the 2s-10s curve inverts, on average a recession is a year to 18 months away.