Bank of England underpinning corporate bond market

The bulk of the Bank of England’s activity in its Asset Purchase Facility has been in buying gilts. Some commentators have said the corporate asset purchase has been too small to be significant. But the corporate bond activity should not be underestimated.

Recent weeks have seen a revival in purchases of corporate paper by the Bank after a fallow period in the summer. The volumes are similar to those following the programme launch in the Spring.

The effect of the Bank’s programme is rather to set a cap on Sterling corporate bond spreads. Although the Bank has recently been offered more than it has bought, the small scale of its purchases generally reflect the illiquidity in secondary corporate bond markets. Such bonds are bought mostly by buy and hold investors. Even “benchmark” corporate bonds don’t trade continuously – unlike high-grade sovereign bonds which are, of course, issued in much higher volumes and are bought by a variety of investors some of whom use them for short-term purposes like liquidity management.

The Bank has said it will keep the APF going as long as conditions justify and that it will give good notice of any ending of the programme.

Corporate bond issuers should be reciting thanks to the Bank each day – and a small prayer that they leave the corporate APF in place well into any upturn.

By John Grout