Article

BoE Corporate Bond Purchase Scheme Little Impact on Primary Market

Post Date: 19/09/2016

Of its Corporate Bond Purchase Scheme (CBPS), on the 12th September,the Bank of England (BoE) stated:  
 

The purpose of the Corporate Bond Purchase Scheme (CBPS) is to impart monetary stimulus by (1) lowering the yields on sterling corporate bonds, reducing the cost of borrowing for companies, (2) triggering portfolio rebalancing into other assets by sellers of assets and (3) stimulating new issuance of sterling corporate bonds.   

We will look to purchase, via the CBPS, a portfolio of up to £10bn of sterling investment grade bonds representative of issuance by firms making a material contribution to the UK economy, in order to impart broad economic stimulus. Our operations will be designed to purchase a balanced portfolio of bonds across eligible issuers and sectors, so that we purchase a representative portion of the market and do not influence the allocation of credit to particular companies or sectors of the economy. The private market will continue to decide which companies can issue in the primary market. Corporate bonds issued by firms we regulate – such as banks, building societies, and insurance companies – will not be eligible.
 

From this statement, one would perhaps be inclined to think that the BoE increases liquidity and Q-eases the primary market, but will it?
 

Has there been more Corporate GBP Issuance in 2016 compared to last year? 

If we use the Data Sheet, with Group Industry Sector = Corporate for Bonds, Notes and MTNs denominated in  Sterling Year to Date  we get GBP20.7bn. When we switch to the same period last year, so until the 19th of September 2015, we get GBP17.8bn.

 

So the answer is yes, there has been more issuance this year in Sterling Corporate Bonds than last year. The same is true if we include CPs and CDs. In this case we get GBP33bn for 2015 and GBP37.5bn for 2016 YTD.  However, most of this is due to other factors than the CBPS. Especially in Money Markets, there are other factors at play.  Afterall, the CBPS was only announced on the 4th of August and during the summer lull there has been, as expected, little issuance.
 

What has the BoE said about the Primary Market? 

Apart from the statement above on the 12th of September. In the August 4th Notice, the BoE said: "The MPC will keep under review the case for participating in the primary market."
 

Are there any Primary Bonds listed in the list of Eligible CBPS Bonds? 

In  the list published:  List of securities eligible for the Corporate Bond Purchase Scheme ,there are 4. The luck ones are:
 

XS1377228959 MOTOPG 3 5/8 03/10/36
XS1391067847 DAIGR 2 1/8 06/07/22
XS1468494239 VOD 3 3/8 08/08/49
XS1472483772 VOD 3 08/12/56
Two of these were actually issued in August, suggesting that the BoE does actually buy a few "primary" bonds. However it is striking that they have not included more of the bonds that were issued earlier in the year. For example XS1375954945 by Scotland Gas Networks, is not included, whilst older deals of this issuer are.

How serious is the BoE in buying GBP Corporate Bonds? XS1375954945
Looking through their list, many bonds are rather old. The majority is well over 5 years. In total the list of Eligible instruments sums to GBP107.3bn, of which the Bank is willing to buy GBP10bn or less than 10%. The focus on older bonds is also interesting, especially considering that more and more corporate issuers are buying those bonds back to refinance in the current market of lower interest rates and longer maturities.  Would a corporate issuer actually be that pleased to see its bonds ending with the Bank of England? Recent data on the UK economy have actually been much stronger than expected. It well be that the Bank through "eligible" bond selection has put a break on its asset purchase plans. As more data is coming out, they may well revise the list.

When does the CBPS Start? 

 The CBPS will commence on 27 September 2016. 

BoE Corporate Bond Purchase Scheme Little Impact on Primary Market?

For the time being we are inclined to think so.