Central bankers have created a market monster, and they're desperate to feed the beast lest it suddenly turn on them.
Ultralow borrowing costs worked for a while, but benchmark rates have sunk so low that more innovative measures have been called for.
The Bank of England entered the fray on Thursday. Not only did it lower interest rates for the first time since 2009, which traders had largely expected, it decided to become a de facto credit trader. It opted to buy up to 10 billion pounds of nonfinancial, investment-grade corporate bonds, alongside 60 billion pounds of government bond purchases.
The BOE plans to avoid buying new corporate bonds, instead purchasing debt that's at least a month old of companies rated investment grade by at least one rating agency. Those measures were more aggressive than many were expecting, as illustrated by the reaction in bond markets. Yields on 30-year U.K. bonds plunged to a record low.
Bonds of big British corporations surged.
This is an extreme measure pioneered by the European Central Bank, which has fueled a 5.6 percent rally in euro-denominated investment-grade debt this year. While the ECB says its corporate-bond buying program has bolstered the region's economy, many credit investors would disagree.
It doesn't really make sense from an investing logic perspective for euro-denominated bonds of Siemens and Robert Bosch GmbH to have negative yields. And there's an increasing fear that this market dynamic is only feasible as long as central bankers keep feeding and exceeding market expectations by continuing to buy bonds and keep rates spectacularly low.
BOE officials argue the central bank is acting as a "first responder" to a material change after the nation's vote to exit the European Union. Their actions have improved the economic outlook and will have a cumulative effect over time, Mark Carney, the governor of the Bank of England, said during a press conference on Thursday. The central bankers could opt to expand their program if needed, he said, though he essentially drew a line at negative rates.
But central bankers are flying increasingly close to the fire. They're distorting markets so significantly that any policy disappointment can roil them drastically. Consider, for example, Japan's decision this week not to further lower its benchmark rates or expand its government bond purchases. The nation's sovereign bonds sold off in the worst rout since 2013, sending ripple effects through global debt markets.
The BOE didn't have a lot of options. It has a mandate to shore up the nation's economy as it navigates through the tumultuous process of leaving its historic relationship with the rest of Europe. The market beast likes what it's getting for now, but it won't be able to gorge forever, and central bankers will have a tough time taming it when the stimulus smorgasbord comes to an end.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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