BoE’s bond purchases may worsen liquidity squeeze

The start of the Bank of England’s (BoE) corporate-bond buying programme today may exacerbate already tight liquidity in the sterling debt market.The central bank plans to purchase £10bn ($13bn) 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 UK 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 programme in June.BoE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Group’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 programme last month as part of stimulus measures designed to help the UK 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 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, which oversees about $380bn. “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 programme, all of which have at least one investment-grade credit rating. The notes have a market value of about £150bn, the institution has said. The issuers are all non-financial companies that make a material contribution to the UK economy, including overseas companies, such as Verizon Communications and Apple.Under the purchase programme, 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 programme 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, Telefonica and Wm Morrison Supermarkets, which were surprisingly left out, said Joseph Faith, a credit strategist at Citigroup.“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% from 2.48%, according to Bloomberg Barclays index data. They were at 2.23% on Friday.National Grid’s gas arm held a record £3bn sale earlier this month as it restructures debt ahead of a spinoff. That was the largest share of the about £8bn of highly rated corporate debt sold since the BoE unveiled the purchase plan on August 4, based on data compiled by Bloomberg.