The Bank of England will start buying corporate bonds on Tuesday when it launches its latest version of quantitative easing aimed at boosting the private sector.
The bank will conduct three “reverse auctions” this week, each aimed at buying the bonds from particular sectors. Tuesday’s auction focuses on utilities and industries. Individual companies include automaker Rolls-Royce, oil major Royal Dutch Shell and utilities such as Thames Water.
However, the corporate bond-buying scheme faces a market overshadowed by the much deeper pools of capital in the US and eurozone as well as companies that may delay investment plans as they contend with the uncertainty over Britain’s future relationship with the EU.
“There’s a fair amount of scepticism in the market about how much they’ll be able to achieve,” said Srikanth Sankaran, head of credit strategy at Morgan Stanley. “They have a relatively low bar to clear.”
He said that one thing to watch out for is what price they have to pay for longer-dated corporate bonds. Much of the demand for sterling bonds comes from insurance and pension funds. As they match long-term liabilities with fixed returns from owning long-dated bonds, they will probably seek a higher price in return for selling such paper to the BoE.
The Bank of England intends to buy £10bn of corporate bonds over the next 18 months. Only the debt of companies that “make a material contribution to economic activity in the UK” is eligible.
The initial impact of the scheme’s announcement was to lower bond yields, which fall as prices rise. The effective yield on debt included in the Bank of America Merrill Lynch sterling corporate index fell from about 2.5 per cent to a record low of 2.06 per cent shortly after the plan was announced on August 4. However, it has since rebounded back to 2.2 per cent.
Value of corporate bonds the Bank of England intends to buy over the next 18 months
The policy has already unleashed a wave of new bond sales in what has previously been a quiet market; earlier this month National Grid sold £3bn worth of bonds, the largest ever sterling deal, while telecoms business Vodafone sold two bonds within the space of a week, just to take advantage of a fall in yields following the programme’s announcement.
“Before the announcement, it looked likely that we would see a net decline in issuance,” said Ketish Pothalingham, a portfolio manager at Pimco. He said that as well as helping the so-called primary markets, it had also boosted trading of outstanding bonds as there was now “some sense of a buyer of last resort being in the market”.
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