In August of last year, the Bank of England (BOE) announced a new round of quantitative easing (QE) that included the purchase of sterling-denominated corporate bonds. Alongside a cut in interest rates, the Corporate Bond Purchase Scheme (CBPS) was designed to boost the UK economy amid a more negative outlook post-Brexit.
Six months into the planned 18-month initial operating period, the BOE has purchased just under £8 billion in corporate bonds against its original target of £10 billion. Assuming it does not extend the programme – and we believe it won’t – the BOE will finish its purchases in April or May.
With the end in sight, it seems a good time to ask: What has been the impact of the bank’s purchases, and what can we expect in the sterling credit market once the BOE withdraws?
Grading the BOE’s success
The stated aims of the CBPS were to increase new issue activity, decrease borrowing costs for UK corporate issuers and encourage more corporate bond market activity as a whole, incentivising investors to move into riskier assets.
Against these objectives, we’d give the bank average marks. While new issue volumes did go up, they were from a limited number of issuers. Spreads relative to gilts initially compressed but have failed to follow global bond spreads tighter, especially dollar investment grade credit. While flows into sterling credit have increased, this has not benefited bonds that weren’t eligible for BOE purchases (as a reminder, eligible companies were those making a “material contribution to the UK economy”). In addition, the brief improvement in sterling corporate liquidity is now under threat as the BOE comes to the end of its programme.
How should investors play this rather mediocre outcome?
At current valuations, our view is that CBPS-eligible bonds, which were heavily concentrated in the transport and utilities sectors, have little scope for further spread compression. We see better value in sectors that were not eligible for the CBPS, including financials, where sterling-denominated bank debt continues to offer good relative value opportunities.
Other bonds that were not part of the CBPS also offer opportunity – especially select “fallen angels” (non-investment-grade bonds that were once investment grade) that have shown improving credit metrics and which we anticipate will return to investment grade over the next 12 to 18 months.
In light of political uncertainty, both in the UK and across Europe, we also believe that keeping portfolios more neutral in credit positioning, with a view to adding more risk as the political issues play out, will prove beneficial to performance over the year.