Bank of England Carney's bond-buying peashooter seen having bazooka-sized impact

Bank of England Governor Mark Carney hosts a quarterly Inflation Report press conference at the Bank of England in central London, on Aug 4, 2016.
Bank of England Governor Mark Carney hosts a quarterly Inflation Report press conference at the Bank of England in central London, on Aug 4, 2016. PHOTO: REUTERS

LONDON (Bloomberg) - Bank of England Governor Mark Carney's entrance into the corporate bond market may have as much impact as European counterpart Mario Draghi's at a fraction of the cost.

The BOE said it plans to buy as much as 10 billion pounds (S$17.5 billion) of securities over 18 months, a figure the European Central Bank surpassed within the first two months of a similar programme.

Mr Carney will target investment-grade, non-financial company notes starting in September to help lower borrowing costs and boost the economy after the UK's vote to exit the European Union.

The programme can have an outsized effect because the sterling bond market is small and relatively illiquid, with only 150 billion pounds of eligible securities, less than a quarter of those available to the ECB, according to Bank of America Corp.

Coupled with the first interest-rate cut in seven years last week, the BOE plan has helped drive corporate borrowing costs in pounds to the lowest on record.

"The BOE's corporate bond-buying program may look small but it will still be powerful," said Ioannis Angelakis, Bank of America's credit derivatives strategist in London.

"Given the lower turnover in the sterling credit market, we think Carney's policy may end up being as bullish, if not more, for sterling credit spreads, than Draghi's programme."

In Europe, spreads over government bonds have tumbled about 40 basis points since Mr Draghi revealed plans to buy corporate bonds in March and are now at 110 basis points.

The premium for sterling investment-grade bonds has fallen to 142 basis points, the lowest in more than a year, from 159 basis points before the BOE announcement, according to Bank of America Merrill Lynch index data.

The average yield on investment-grade corporate bonds in pounds has tumbled to an all-time low of 2.2 per cent from 2.5 per cent on Aug 3 and about 3.5 per cent at the start of the year, the data show.

The collapse in borrowing costs is fueling issuance.

August is already the busiest month for sterling corporate bond sales in more than a year, with Vodafone Group selling two multi-decade notes last week, BMW issuing six-year bonds on Monday and BP said to be marketing securities on Tuesday.

"Whilst the BOE programme is expected to be slightly smaller than the ECB's compared to the size of the estimated eligible universes, the effect can be as great, if not greater," said Jonathan Pitkanen, the head of investment-grade research for EMEA and Asia at Columbia Threadneedle Investments, which oversees about 344 billion pounds of assets.

"It's already leading to increased supply."