The Bank says it will be “representative of issuance by firms making a material contribution to the UK economy in order to impart broad economic stimulus.”
Due to commence on 27 September, the Corporate Bond Purchase Scheme (CBPS) has the intention of lowering sterling corporate bond yields, which aims to reduce the cost of borrowing for companies.
Importantly, the Bank will only purchase investment grade bonds issued by companies that “constitute a material contribution to the UK economy”. This can also include firms incorporated abroad as long as they have a genuine business in the UK, especially those with large numbers of employees and generate significant revenues.
A list of bonds currently eligible for purchase under the CBPS has been released and it includes some of world’s largest companies such as Apple, McDonald’s and Vodafone.
Although the anticipated driving-down of corporate bond yields could be detrimental to fixed interest funds, existing high-yielding assets will become more sought after. Therefore, the most successful managers will seek to take advantage of this changing landscape and uncover the best opportunities.
However, the size and consistency of returns over the past five years will be difficult to sustain, unless managers adopt a riskier approach and chase higher yields from companies more likely to default. Although this is a move solely enacted by the UK’s central bank, the impact on bond yields will be greater, especially with the close integration of global markets.
Negative yields
Bond yields have been a big talking point recently due to a number of central banks issuing negative interest debt. Government bonds in Germany, Japan and Switzerland have all been sold with minus rates attached, and more are expected to follow.
The halving of interest rates has thrown a great deal of speculation as to whether the UK will follow, and although some gilts traded negatively shortly after the referendum result, this is not an outcome that is currently expected. However, if UK interest rates witness further cuts, then gilt yields will drop accordingly.
With the true impact of Brexit still very much on hold until the UK’s departure has been agreed, central banks could be forced to take further drastic action in any attempt to shield their economies from the potential fall out.
Managers will certainly be monitoring events closely and exercise a great degree of due diligence when considering where to allocate funds as a global recession could be on the horizon in light of the continued uncertainty.
