S&P Downgrades UK Credit Rating

 | Jun 28, 2016 06:04AM ET

Market Brief

The fact that Standards & Poor’s downgraded the UK's credit rating from AAA to AA with a negative outlook was not exactly a surprise especially after Moody’s reviewed UK’s credit rating outlook to negative on Friday. Usually, a lower credit rating implies higher borrowing costs. Ironically, this is not what we are seeing on the market right now as UK yields have dropped massively amid the Brexit vote. 2-Year yields fell to 0.15%, down 37bps, while 10-Year yields are down 44bps to 0.935%. Indeed, risk-shy investors are reluctant to hold risky assets, preferring to buy bonds instead, and since the price of bonds has an inverse relation to interest rates, rates are moving lower. The UK credit rating downgrade has not had any effect on GBP/USD as the information was already priced in. Furthermore, AA is still a very good investment grade given the overall situation. After hitting a 31-year low on Monday, the pound sterling recovered slightly during the Asian session and retuned to 1.3380, up 0.46% on the session. The one-week 25 delta risk reversal on GBP/USD continued to recover on Monday, reaching -3.27% compared to almost -14% last Thursday. However, the figure is still well below the neutral threshold, suggesting that investors are not ruling out further sterling weakness.