Credit market liquidity could deteriorate as BoE ceases purchase scheme, says Buckle

Liquidity in the UK credit market could begin to dry up as the Bank of England halts its corporate bond purchase scheme, according to Iain Buckle, co-manager of the £691m Kames Sterling Corporate Bond Fund.
Buckle, who runs the fund alongside David Roberts, head of fixed income at Kames, says that while liquidity is currently abundant, he is concerned that investment banks will retrench as the central bank’s Corporate Bond Purchase Scheme ceases – something he believes could occur as soon as next month.
“Liquidity in the sterling corporate bond market is as good as I can remember it over the past few years, with investment banks very keen to trade the asset class,” Buckle says.
“But I can’t help believing that the growth in liquidity is a function of the Bank of England scheme, with investment bank traders willing to commit balance sheets in the knowledge that they have a ‘back-stop’ buyer in the Bank of England. Will they be as willing when the Bank has shut-up shop? It wouldn’t surprise me if we have an unsettled period in the immediate aftermath.”
Buckle adds that it will be interesting to see if some of the ‘skews’ the Bank’s scheme has imparted on the market start to unwind as it withdraws its support.
“Although the scheme has undoubtedly supported the broader market, it has not been a tide that has lifted all boats,” he says. By way of example, he says there has been significant divergence in performance of bonds from Vodafone and UK property company Segro. While both have been included on the Bank’s list of eligible securities, credit spreads on Vodafone bonds are wider since the launch of the programme, whilst Segro bonds are trading at their tightest credit spread in more than five years.
“I suspect the Bank has been offered lots of Vodafone bonds as part of their buying programme, but very few Segro, and this is reflected in their relative performance,” Buckle says. “You could replicate this analysis across any number of constituents of the eligible list and draw similar conclusions. I would expect that some of these distortions start to iron themselves out in the coming months.”