Carney's Corporate-Bond Purchases May Worsen Liquidity Squeezeby
Central bank aims to acquire 10 billion pounds of company debt
Buying may tighten shortage of notes in small sterling market
The start of the Bank of England’s corporate-bond buying program on Tuesday may exacerbate already tight liquidity in the sterling debt market.
The central bank plans to purchase 10 billion pounds ($13 billion) of sterling investment-grade corporate debt over 18 months, heightening competition in a relatively small market that is dominated by investors who favor sterling assets, such as U.K. pension funds. It also adds to a wider debt-market pinch, partly caused by the start of a similar European Central Bank corporate-bond buying program in June.
BOE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research. “It creates a real squeeze in the market.”
Sterling corporate-bond yields fell after BOE Governor Mark Carney announced the purchase program last month as part of stimulus measures designed to help the U.K. economy weather uncertainty caused by the nation’s vote to leave the European Union. A flurry of issuance subsequently has also done little to expand the debt pool because sales have been dominated by companies such as National Grid Gas Plc refinancing existing debt.
“We’ve not really seen a lot of new issuers,” said Luke Hickmore, an Edinburgh-based senior investment manager at Aberdeen Asset Management Plc, which oversees about $380 billion. “That’s the thing we need to be looking out for.”
The Bank of England has drawn up a list of about 270 bonds that are eligible for purchase under its program, all of which have at least one investment-grade credit rating. The notes have a market value of about 150 billion pounds, the institution has said. The issuers are all non-financial companies that make a material contribution to the U.K. economy, including overseas companies, such as Verizon Communications Inc. and Apple Inc.
Under the purchase program, the bank will attempt to buy each bond on its list at least once a week through reverse auctions on Tuesdays, Wednesdays and Fridays. Purchases will be roughly in line with the makeup of the overall bond market, on an industry basis. In the first auctions on Tuesday, the bank will seek to buy notes in sectors including energy, industrial and transport, and water, according to a list on its website.
A Bank of England spokesman declined to comment on the impact of the program on market liquidity.
To overcome the potential challenges in finding bonds, the Bank of England may extend its list of eligible notes. That could include adding companies such as GKN Plc, Telefonica SA and Wm Morrison Supermarkets Plc, which were surprisingly left out, said Joseph Faith, a credit strategist at Citigroup Inc.
“Some names that you would have expected to be on the list are not there,” Faith said. “We may see more bonds being added next month.”
Since the BOE announced the plan, yields on investment-grade corporate pound bonds have dropped to a record-low 2.06 percent from 2.48 percent, according to Bloomberg Barclays index data. They were at 2.23 percent on Friday.
National Grid Plc’s gas arm held a record 3 billion-pound sale earlier this month as it restructures debt ahead of a spinoff. That was the largest share of the about 8 billion pounds of highly rated corporate debt sold since the BOE unveiled the purchase plan on Aug. 4, based on data compiled by Bloomberg.