European bonds are not appropriately priced for a potential exit of the UK from the European Union, says Franklin Templeton Investors.
Polls from the UK are predicting a close result, says Franklin Templeton head of European fixed income David Zahn, adding that volatility in the equity and bond markets is likely to continue.
Mr Zahn said the impact of a Brexit would be “very unsettling” and “far reaching”, warning that the European bond market is not pricing in this risk.
“European bonds generally, and peripheral government bonds in particular, don’t appear to us to be adequately reflecting the risk of Brexit in their pricing. While there seems to be some reflection of the risk in prices for UK corporate and government bonds, we don’t see that more widely in European markets,” he said.
Mr Zahn noted that several international finance bodies, including the World Bank and US Federal Reserve, have also commented on the potential for a Brexit to disrupt global markets, and described the European bond pricing as “a concern”.
“If there is a UK vote to leave, or if the vote is close, that will likely create a lot of unknowns and bond price spreads could widen over the short term,” he said.