‘Old lady’ invests in corporate bonds

Investors have been buying corporate bonds as a savings vehicle for a number of years in the UK, however yesterday they were joined by the oldest lady of them all –  the Bank of England. The BoE yesterday commenced its investment programme by buying £85.5 million of sterling corporate bonds.

The reasons why she is doing this are (1) to improve liquidity in the UK corporate bond market; (2) to reduce the cost of borrowing for companies with significant business interests in the UK; and (3) to supplement the quantitative easing they are doing through gilt purchases.

This is obviously going to be beneficial for corporate bonds, at least in the short term, because increased liquidity and buying of the asset class should help its performance. Within the corporate bond sector, they are aiming their firepower at better quality, non-bank issuers.  These bonds are obviously going to benefit most from this buying programme.

This buyer is not however the usual little old lady.  This one owns a magic purse containing many billions of pounds courtesy of her right to literally print  money. On the first day the purchase programme she took out £85.5 million of bonds.  The plan is for every Tuesday through to Friday of every week to repeat this exercise (not sure what’s wrong with Monday, maybe it’s washing day). Therefore one might expect buying of roughly £350 million a week. To put this in context, her investment grade bond fund at this rate will be over £4bn in size by the end of June, probably making it the largest corporate bond fund in the UK retail universe.  In January, according to the Investment Management Association (IMA), retail investors put a net £1.4bn into sterling investment grade corporate bond funds, so in relation to current flows, this old lady will be roughly doubling demand.

As a corporate bond investor, this action is obviously going to have a significant influence on the market place. From the Bank of England’s point of view, we will have to see how successful she will be through this bond buying programme, though given her cost of finance is zero and she is buying bonds at attractive yields, it might turn out to be quite a profitable exercise if she is a long term investor.