Kames Capital: BoE’s bond buying leads to material divergence between “ins and outs”

The Bank of England’s recent release of the list of eligible securities for its corporate bond buying programme, has led to a material divergence between the “ins and the outs” according to Rory Sandilands, an investment manager within the fixed income team at Kames Capital, with those 92 issuers included outperforming by up to 10bps.
The BoE first announced its intention to purchase up to £10bn of corporate bonds over a period of 18 months on the 4^th August, leading to large amounts of speculation as to what would and wouldn’t be included.
Commenting on the list, Sandilands pointed to a number of anomalies in the application of the Bank’s criteria for inclusion, noting that “UK focussed credits like Morrison and GKN have been excluded yet both fulfil the BoE’s criteria of making a ‘significant contribution to the UK economy’”.
Sandilands also noted that US entities such as AT&T and Verizon were “surprising inclusions.”
Given these relative spread movements, Sandilands says it is vital that the market is able to understand these anomalies and anticipates there will also be demand for further clarification around more technical aspects of the criteria. For example, energy provider EDF has been included but its 2114 bond has been left out, despite the BoE’s criteria only excluding perpetual debt.
“The list is narrower than we would have envisaged, based on the initial criteria announced in August. However, we take comfort from the fact that the BoE has indicated that this is an initial list and they will be receptive to comments from market participants around the lists constituents”, said Sandilands.
The BoE has stated that it intends to update the published list on a monthly basis and have indicated a number of secured bonds are currently under review for inclusion.
Commenting on the wider effect of the announcement, Sandilands said, “given the ECB programme has resulted in an estimated 23% outperformance of eligible bonds, monitoring the evolution of this programme will be a key input for Sterling investment grade decisions. We anticipate the programme will continue to have a material impact on sterling credit valuations and the sterling credit market more broadly.”