Those with a good memory will recall that the Bank of England’s last significant attempt to buy corporate bonds was in the aftermath of the 2016 EU referendum. It took them several months to build up a £10bn portfolio, finally finishing in April 2017. From an investor’s point of view it was a somewhat drawn-out, convoluted and opaque process. The Bank drew up an eligible list of bonds it would buy, then held reverse auctions three times a week in which it invited investors (via the large investment banks) to show them offers in those bonds. The eligible list itself was somewhat debatable, they refused to buy bonds that the issuer could redeem at no cost within 3-months of final maturity (a “3-month call option” and a pretty standard feature in corporate bonds), and they limited themselves to only buying a relatively small amount (10m) of an individual bond on any one day. For many investors it felt far too cumbersome and after an initial period of enthusiasm it quickly became something of a sideshow. The Bank briefly restarted its Corporate Bond Purchase Scheme (CPBS) back in August last year to re-invest some of the interest and principal they had harvested from the portfolio they bought in 2016/17.
So when the Bank announced it would restart the CBPS as part of its recently announced QE programme there was a hope, if not an expectation, that the process would have evolved to make it more user friendly. The Bank finally announced the details of its CPBS late on the 2nd of April. So what, if anything, has changed? Let’s start with the positives, at least as I see them. (1) The amount they are buying is meaningful – “at least” £10bn, with potential to grow. This becomes more important when you couple it with (2) They aren’t going to take nearly as long to go about it. They start buying on the 7th of April, and to quote the Bank themselves “It expects to make these purchases at a significantly faster pace than in the 2016 scheme”. To do this they will increase the amount they will buy of individual bonds (from 10m to 20m) at each auction. (3) They will potentially buy bonds with 3-month call options, although they are not as yet on the current list of eligible securities.
Which takes me to some of the lingering flaws in the scheme (1) The list of eligible securities hasn’t been updated since August 2019! During that time there have been a significant number of bonds issued that would have otherwise qualified for inclusion. They have promised to revise the list mid-April, but would it really have taken that much work to bring it up-to-date? I’m sure a friendly investment bank would have helped them out. (2) They still won’t buy “new issues”. Bonds must have existed for a month before the Bank will buy them. This is in contrast to how the ECB conducts its corporate bond QE purchases. They will happily buy bonds on the day they are issued. Relaxing this rule could have really helped to boost new £ corporate bond issuance. I still think we’ll see a meaningful uptick in issuance (see comments below), but this would have been a game-changer.
The pace of the buying is the most important change here. It seems the Bank has got the message that if they want to make a real impact – and not descend into an afterthought – they need to move at a much quicker pace than the last time. The other issues become somewhat secondary. The “clunkiness” of the system will no doubt frustrate £ credit market participants, but I’m sure that is well down the Bank’s list of considerations.
So will the CPBS meet its objectives? Well if the primary objective is to improve overall liquidity in the £ corporate bond market (which the Bank says it is), then I think it will, although its impact will vary widely. Since the acceleration in the Covid-19 pandemic, liquidity in the £ credit market has deteriorated rapidly, especially in certain areas such as short-dated (<5 years to maturity) bonds. This has the potential to kick some life in to that part of the market. For other parts, especially longer dated, relatively high quality bonds, it may well have the opposite effect, making them increasingly difficult to source for investors. Finally, I expect the restart of the CBPS to result in a significant increase in issuance of £ corporate bonds. This was certainly the case back in 2016 when companies rushed to issue debt in the aftermath of the Bank’s announcement. It could be bigger this time around. We have seen very little issuance in the £ market in the last few weeks, certainly relative to the $ and € markets where there has been a glut of issuance from companies looking to bolster their liquidity in these uncertain times. Despite the quirk that the Bank refuses to buy bonds at issue, I fully expect lots of Treasurers and Finance Directors at large UK companies are eyeing up the CBPS as a means of doing the same thing.