BoE corporate bond buying kicks off tomorrow, may exacerbate liquidity squeeze

The Bank of England (BoE) will start buying corporate bonds tomorrow (Tuesday, 27th September) as part of its post-Brexit plan to support economic growth. The central bank plans to purchase 10 billion pounds ($13 billion) of sterling investment-grade corporate debt over 18 months.

Investors were seen piling into sterling issues from corporate and financial issuers as they tried to get ahead of the Bank of England's corporate bond purchase scheme. The BoE announcement has heightened competition in a relatively small market that is dominated by investors who favor sterling assets, such as U.K. pension funds. There has been a flurry of large deals, including £3bn from National Grid, and £1.8bn in the space of a week from Vodafone.

A similar scheme was launched by the European Central Bank in June. BoE's bond buying program adds to a wider debt-market pinch, partly caused by ECB. The BoE will be buying the bonds through reverse auctions on Tuesdays, Wednesdays and Fridays. Investors and central banks will be watching markets closely to see what kind of reception they get.

BOE note-buying “is another nail in the coffin of corporate-bond liquidity,” said Jeroen van den Broek, ING Groep NV’s Amsterdam-based head of debt strategy and research. “It creates a real squeeze in the market.”