Bank of England Re-Enters the Corporate Debt Market

logo-cropped-11Post-Brexit stimulus effort by BOE begins

Source: The Wall Street Journal

The Bank of England made its first foray into the corporate bond market in three years on Tuesday, with an offer to buy the debt of companies in sectors including energy, transport and finance.

How successful it was in picking up assets won’t be known until results are published Oct. 6. But, according to some investors, the central bank’s first day back in the market passed pretty quietly.

“We hear a few things have sold off the list, but not enough to know if it’s gone well or otherwise” for the central bank, said Luke Hickmore, a fund manager at Aberdeen Asset Management PLC. Mr. Hickmore added he didn’t put in any offers to sell, preferring to wait to see how bond prices react as the program progresses.

Prices for sterling-denominated corporate bonds barely budged, according to investors. “All rather boring,” said Edward Farley, head of European corporate bonds at PGIM Fixed Income.

Analysts say the BOE won’t be fazed, though, as Tuesday was only the first step in a program scheduled to run 18 months, and debt issuance and demand already have picked up since the BOE announced its plan in August.

The central bank said in August it plans to buy £10 billion ($13 billion) in corporate bonds in a bid to lower borrowing costs for companies and spur spending and investing. The initiative has helped boost bond issuance, a key goal. On Tuesday, London-based support-services company Babcock International Group PLC said it plans to issue a £250 million bond with a 10-year maturity, while a unit of energy supplier National Grid PLC recently sold a £3 billion bond to investors.

Demand for sterling corporate bonds also has increased: Yields, which move inversely to prices, currently average 2.18%, compared with 2.46% before the announcement of the BOE plan on Aug. 4, according to figures by Bank of America Merrill Lynch.

The BOE in September published a list of more than 300 sterling-denominated corporate bonds eligible for purchase. They included the debt of U.S. tech giant Apple Inc. and German auto maker Daimler AG. Bonds don’t have to be from U.K.-based companies. Rather, the BOE said it would purchase the debt of firms that make “a material contribution” to the U.K. economy.

Corporate bond purchases will take place on Tuesdays, Wednesdays and Fridays. The central bank said it won’t publish the results of its daily operations. Instead, it intends to publish a running total of corporate bonds purchased each Thursday, beginning next week.

The BOE bought small amounts of corporate bonds in the aftermath of the financial crisis as part of an asset-purchase program that eventually totaled £375 billion, although its holdings were eventually sold back to private investors.

This time around, the purchases are just one part of a multipronged stimulus effort implemented in August in the wake of voters’ decision to take the U.K. out of the European Union. Officials also cut their benchmark interest rate to a new low of 0.25% and announced plans to buy £60 billion of U.K. government debt. Those purchases began last month.

In the eurozone, the European Central Bank has sparked a similar issuing bonanza. Unlike the BOE, the ECB is permitted to buy bonds directly from issuing companies through private placements. This has led corporations to create new debt especially tailored for the central bank to buy. Since it launched its plan in June, the ECB has bought €13 billion ($14.6 billion) of euro-denominated corporate bonds.