BOE’s bond-buying plan is already paying off

Big 5

Without having yet bought a single corporate bond, the Bank of England (BOE) is already achieving its aim, simply by saying it plans to do so.

One of the goals of the bond-buying program is to “stimulate issuance in sterling corporate bond markets.” Immediately after the U.K. vote to leave the European Union, analysts soured on the outlook for issuance. Barclays PLC cut its 2016 forecast from £35 billion ($46.04 billion) to £17.5 billion.

But after the BOE went public with its plan, the spread on A-rated sterling corporate bonds narrowed to 1.38 percentage points, not only its lowest in a year but also lower than the spread for their dollar-denominated equivalents, according to Markit’s iBoxx index. That bodes well for issuance.

The spread for each index measures the yield on corporate bonds, relative to local sovereign yields. For sterling, that shows how much higher yields for corporate bonds are than for British government gilts. For the dollar index, the differential is relative to U.S. Treasury debt.

Spreads are often used to measure investors’ appetite for risk. Bearish investors are reluctant to buy corporate bonds, preferring safer sovereign debt. That drives up yields on corporate debt, increasing spreads. For most of the past five years, sterling-denominated corporate bonds have had higher spreads than their U.S. peers.

The lower U.K. spread is precisely the outcome the Bank of England seeks. Narrowing spreads make it more attractive for companies to issue sterling-denominated bonds.

Source: MarketWatch