Flying under the radar of the recent “Super Thursday” Bank of England announcements was the news that the Bank is about to start buying corporate bonds again.
As investors ponder whether the European Central Bank will restart its CSPP (Corporate Sector Purchase Programme), the Bank was releasing some details of its upcoming purchases. Some of you may remember that the Bank bought £10bn of corporate bonds through the second half of 2016, and the first part of 2017. It was part of the quantitative easing (QE) policy they put in place after the EU referendum in the summer of 2016. Well, since then they have been collecting coupon payments and redemption proceeds from the bonds they hold, and they believe that it’s time to start investing some of that money.
They have yet to quantify the exact amount, but it’s likely to be around £500m. In the grand scheme of things this doesn’t sound particularly market moving, but it does throw out some interesting questions.
Back in 2016 the Bank drew some criticism on how it drew up the list of companies whose debt it would buy. The definition was “companies (including their finance subsidiaries) that make a material contribution to economic activity in the UK”. That sounds admirable, but the inclusion on the list of companies like American telecom giant AT&T left many scratching their heads.
Moreover, back in 2016 the Bank was happy to “hoover-up” bonds from companies whose main exposure was to the UK retail sector… but a lot has changed in three years. The sector is now facing significant structural headwinds. Will the Bank still be comfortable buying bonds from the likes of Hammerson, the owner of a number of large UK shopping centres? They will update the list of eligible bonds later this month – I have no doubt it will certainly make for interesting reading.
Finally, will the Bank treat this foray back in to the corporate bond market as something of a dry-run for a much larger programme later in the year? A number of market participants have speculated that should the UK have a disorderly Brexit, the Bank will look to stimulate the economy through another round of QE, which will presumably include a much bigger portion of corporate bond buying.
The way the current Brexit process is developing, perhaps UK credit investors need to prepare themselves for the Bank being an active participant in their market for the foreseeable future.