UK rates are higher so why borrow pounds? - BBH

In additon to, GBP: Consequences of the devaluation - BBH, the analysts at Brown Brotehrs Harriman explained that there are different measures of inflation expectations.

Key Quotes:

"A common market-based measure is the 10-year break evens.  This is the difference between the yield of traditional and inflation-linked securities.  

In hard numbers, the 10-year breakeven has risen from 2.30% immediately after the referendum to almost 2.70% at the end of September.  It reached 3.05% yesterday.  To be sure, the 10-year breakeven may be skewed by liquidity considerations, but it is a rough and ready measure that shows that sterling's decline boosting inflation expectations.  If these expectations are indeed realized, many of the benefits through to accrue due to sterling weakness will be offset by higher prices.  

This also has implications of fair-value for the pound.  The OECD's model of purchasing power parity has sterling 19% undervalued today.    Most of the time, OECD currencies do not move much beyond 20% +/- PPP.  However, as we have seen with the yen, for example, sometime PPP moves toward foreign exchange prices not foreign exchange prices moving toward PPP. If the higher inflation expectations are born out, then PPP measures will likely fall.  

Lastly, many economists and journalist write from the perspective of the asset manager or speculator.  However, there is another market segment and their activity is also important.  In sterling's case, think about the debt manager.  UK rates are higher so why borrow pounds?  And to be sure, corporate issuance of sterling paper has surged.  In first three months after the referendum, foreign corporates issued roughly GBP16.4 bln paper.  This is nearly four times more than the previous three months.  Part of this may be creating more product, which may qualify for BOE purchases under its new version of QE.  There may also be advantages for some debt managers to borrow in currency they expect to depreciate."