BoE Super Thursday: stocks to watch

Whilst investors discount the likelihood of much market impact Bank of England’s ‘Super Thursday’, the bank has made one significant policy tweak in recent days.

Are BoE’s days as corporate bond whale over?

Whilst investors discount the likelihood of much market impact from the Bank of England’s ‘Super Thursday’, the bank has made one significant policy tweak in recent days.

It ended its £10bn corporate bond purchase scheme (CBPS), 11 months ahead of schedule.

The announcement, towards the end of last month, made no discernible stock market waves. In the corporate bond market, spreads remained firm, with no disruption in deal flow. That suggests the Bank’s exit from the corporate bond market after buying £9.978bn—just short of its £10bn target—is so far pain-free.The smooth and swift nature of the process, lasting well short of the “initial period of 18 months” the BoE envisaged when it announced the CPBS last August, points to robust demand. That raises the question of whether or not the Bank might be tempted resume the programme at some point.

Record tights

Naturally, there are questions about effectiveness and even necessity, and they’re not easy to answer. On the pro side, corporate yields began to tumble as the market anticipated the scheme would be launched, even if yields only dipped moderately once the scheme was active. Additionally, the cross-market volatility some feared at the end of the CPBS didn’t appear. Spreads between company paper and gilts did widen as the BoE’s exit approached, but the iBoxx GBP non-financials index traded 6bp tighter a day after the BoE announced completion vs. when the CPBS was announced last August.

As for how much new issuance the scheme actually encouraged, £8.95bn of investment-grade bonds were launched between early August and late September versus £4.7bn in the months before. Notable issues included multimillion 33-year and 40-year notes from Vodafone, and a £250m 10-year bond from Babcock. Again issuance since September has been closer to pre-CBPS run rate, but the overall impact is clear.

Looking at the stock market, it is arguable that the FTSE 100’s 10% rise since August owes at least as much to sterling having remained close to over 30-year lows for most of that stretch. Still, there were signs of yield pressure on some large FTSE names last month. Vodafone for instance saw its spread blow out to 215bp by early April vs. 165bp at issuance. British American Tobacco, another big bond market tapper since the scheme started, saw spreads widen somewhat less. Elsewhere, paper from major FTSE 100 issuers traded near record ‘tights’ ahead of CPBS being would-up—a potential reversion warning.

Painless and neutral

In theory then, stock market pressure is possible as new yield opportunities appear, though the extent to which such moves have already played out is sketchy. Another consideration is that the BoE's eligibility criteria were idiosyncratic. Banks were out but companies making a “material contribution” to the UK were in. (For the BoE that condition curiously included two of the world’s biggest producers of cigarettes, Imperial Brands and BAT.)

Either way, given that the Bank’s company bond experiment has largely been pain-free for financial markets, politically neutral (at worst) and demand was unequivocally high, chances that the BoE will keep the tool on the table seem better than evens to us. We note that whilst Britain’s forecast-beating economic resilience since the Brexit vote has wrong-footed the Bank, its now-departed Deputy Governor Charlotte Hogg said as recently as late February that the path of business investment was still unclear. It makes sense to keep an eye and ear open for hints that the CPBS could return, though sensitive antennae would be necessary to perceive such hints on Thursday. A restart would probably be in the context of a widened gilt purchase programme, with no prospect of the latter for now.

There is however a chance that comments on the performance of the expired CPBS on Super Thursday will be interpreted by the market as auguring well or badly for a successor scheme. On that basis, the strong preponderance of British utilities, telecoms and transportation, names that were deemed 'eligible', as well as Vodafone, Babcock, Imperial Brands and BAT, could be among the most active major stocks in the near term.

More bank pressure

Separately, the BoE earlier this week laid out conditions for new 'bank bailout bonds' for the first time, ahead of higher interim capitalisation targets from 2020. The new capital needs have largely been stipulated by the European Banking Authority’s forthcoming MREL regime. (Minimum Requirement for own funds and Eligible Liabilities). Usually, increased regulatory capital results in renewed market pressure on banks to comply.

The BoE said on Monday it anticipated MREL would range from 21.6% of total value of exposures for Standard Chartered to 25.9% for Santander UK. Governor Mark Carney could elaborate on Thursday. If so, look for potential reaction in StandChart, Barclays, RBS and via its large UK presence, Madrid-listed Santander. Also potentially among what the market calls ‘challenger banks’ like Virgin Money, Aldermore, OneSavings and others. The BoE floated a new 22% indicative average threshold for these.

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