BoE’s corporate bond buying surpasses expectations

The Bank of England’s corporate bond buying plan has moved much faster than investors expected with the central bank surpassing half of its total target just five months after the programme was launched.

Started in September as part of the central bank’s plan to cushion the economy from any fallout from the Brexit vote, the programme has seen the BoE buy £5.2bn of corporate bonds, according to the latest data released on Thursday.

Policymakers at the bank set out to buy up to £10bn of bonds over an 18-month period, alongside cutting interest rates to record low levels.

“It’s had a positive effect in terms of issuance,” said Lloyd Harris, an investor at Old Mutual. “If they hadn’t responded, then I can see the economy would be in a slightly worse place.”

The programme triggered a rush of issuance in the UK’s corporate bond market. In September, sterling corporate bond sales hit their highest monthly levels in more than seven years.

It has also supported prices for outstanding bonds. An index measuring the overall total return on sterling corporate bonds is up 3.7 per cent since June, though it is currently lower than the levels it touched last August when rates touched record lows.

The purchases, according to the BoE, are intended to lower yields, trigger portfolio rebalancing into other assets, and increase issuance. It also said it would buy bonds of companies make a “material contribution to the UK”.

Under the plan, investors offer bonds they want to sell to the central bank. A total of bonds with a face value of £110bn were eligible for purchases.

“The rate of purchases has surprised to the upside, in part because UK fund managers found bonds to sell them,” said Zoso Davies, a credit strategist at Barclays.

Traders and strategists closely watch data on bond purchases from the central bank for clues as to when the programme will end.

The interest echoes that on European corporate bonds, which the European Central Bank has been buying since June and whose programme has similarly bolstered prices.

The sterling bond market has diminished in stature over recent years with many companies preferring to borrow in dollars or euros. Some market participants have seen the corporate bond purchases as a revitalising force.

“The CAPS [corporate bond purchase scheme] seems to have increased trading flows — it took a market that was blocked and unblocked it,” said Mr Davies. “Sterling issuance had dwindled to almost nothing — CPBS reopened the pipeline.”