Selling bonds on the cards at the Bank
IN WHAT has been interpreted as its first steps towards ending the £200bn quantitative easing (QE) programme, the Bank of England yesterday set out proposals to allow it to sell as well as buy corporate bonds in the secondary market.
The Bank said: “The focus of the corporate bond secondary market scheme is to facilitate market-making by banks and dealers, to help to reduce liquidity premia on corporate bonds, and so remove obstacles to corporate access to capital markets.”
It noted that since the asset purchase facility has been launched, conditions in the sterling corporate bond primary market have improved but trading conditions in secondary markets continued to be restricted. The Bank is hoping to implement the scheme as early as possible in 2010.
The move was welcomed by the corporate bond market. Gary Jenkins, head of fixed income research at Evolution Securities, said: “This is a sensible move by the Bank and it gives them total flexibility. It is a clever way of removing themselves from the corporate bond market without spooking investors. I can’t think of a neater and tidier way of doing it.”
He added that investors had been concerned as to what would happen if the central bank suddenly announced it would be withdrawing fully from the market in the next three to six months.
But Lombard Street Research’s Jamie Dannhauser said he saw little logic in the proposed scheme.
“If the argument is that the Bank is entering the corporate bond secondary market because there are not enough buyers, then how can it reckon it will find buyers for bonds it is selling,” he said. So far, the Bank has bought £1.5bn worth of corporate bonds.
While these proposals were seen as marking an end to QE, the Bank stated that they have “no implications for the accomplishment of the wider asset purchase programme”.