The Bank of England is within sight of the end of its corporate bond purchase scheme, a year ahead of schedule, having bought in excess of £9.1bln worth of bonds since the end of September last year. Given the relatively robust performance of the economy since Brexit, an increase to the £10bln target at this stage is deemed highly unlikely.
Evidence would suggest that the original aims of the programme – reducing the cost of borrowing for companies, encouraging companies to issue more corporate bonds and triggering portfolio rebalancing into riskier assets – have largely been met. Corporate bond supply has increased, spreads are tighter (albeit not uniformly) and lower quality spreads have compressed.
While not an explicit aim, the consistent bid for risk over the past few months has also led to reduced volatility and a marked improvement in liquidity. Going forward, a deterioration in that secondary liquidity following the end of the programme is a concern. As the rate of the Bank’s buying slows, recycling risk becomes more challenging, particularly given relatively tight valuations. Dealer inventories grow and spreads widen. There is evidence this is happening. Sterling credit spreads (libor OAS) are currently c7bps tighter YTD having been as much as 13bps tighter in early March.
The end for sterling corporate QE is not the only factor driving our currently cautious stance towards credit risk. Brexit uncertainty, the potential for Trump disappointment and European political risk also vex. However as a precursor to the potential end of the ECB buying programme next year, it is certainly worth watching.