Surprise! Just when it seemed that the Bank of England was good for nothing but cutting rates, the institution has pulled a new trick from its policy hat: £10bn in sterling non-financial investment grade corporate bond purchases over an 18 month period.
Barclays economists described the move as unexpected. As well they might - year-to-date, total investment grade government bond issuance in the UK (i.e. including financials) amounts to £6.3bn according to Dealogic. The Bank has now entered the market in a big way, and the UK's debt capital markets bankers and credit traders have reason to be thankful.
The Bank of England has come to the salvation of the country's debt capital markets (DCM) bankers. As the charts below show, DCM issuance fell off a cliff in the run up to the EU referendum. It stayed that way in July. Come September, banks might well have been inclined to pare headcount unless it recovered.
Although the BofE's £10bn will be dribbled out between now and February 2018, the Bank is clearly expecting its newly extended QE to have an affect - and not just in the investment grade market. "Given that corporate bonds are higher-yielding instruments than government bonds, investors selling corporate debt to the Bank could be more likely to want to invest the money received in other corporate assets than those selling gilts," says the bank in its August inflation report, released today. The hope seems to be that the corporate QE boost will feed through to stronger private sector demand for corporate debt - be that investment grade or (maybe even) high yield.
To the extent that the new 'IG Sterling QE' boosts demand for all corporate debt, high yield bankers could indulge in optimism too. They too need it: there was no sterling high yield issuance whatsoever in June and July's issuance was insipid compared to 2015.
Based upon historic UK bond issuance, the biggest beneficiaries of the Bank of England's new programme will be DCM bankers who deal with utilities and with consumer companies. In combination, these two sectors account for 61% of the UK's outstanding stock of sterling investment grade bonds according to the chart below from Bank's inflation report. If utilities take up the mantle, the new QE could even approximate a fiscal boost from additional government spending on utilities investments.
Lastly, while £10bn of buying is an irrelevance in Europe's secondary credit trading market, it might make a difference at the margins. Most European banks (Barclays excepted) saw credit trading revenues fall in the second quarter. This could just give them a boost. "Volumes have just been very, very skinny in credit trading this year," says Chris Wheeler, an analyst at Atlantic Equities. "What banks really want is higher margin high yield trading activity as clients reconstruct portfolios."
To the extent that the BofE's scheme reduces yields on sterling investment grade bonds, some reconstruction might now happen. Equally, as the Bank of England's chart below shows, concern about investment grade defaults has been rising in the UK since 2015, bringing the potential for spreads to widen - which would have been bad news for mark to market losses on banks' sterling bond trading books. That risk too has now been mitigated. Thank goodness for the Bank of England.
Photo credit: Bank of England Governor Mark Carney speaks at the 2015 Policy Exchange summer party by Policy Exchange is licensed under CC BY 2.0.b