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Forget Super Thursday, when will the Bank sell its bonds?

M&G bond supremo Richard Woolnough believes a reversal of the post-Brexit vote cut in interest rates tomorrow will not be as dramatic as unwinding the Bank's corporate bond-buying spree.

 
Forget Super Thursday, when will the Bank sell its bonds?

M&G bond supremo Richard Woolnough hopes a sell-off of corporate bonds will be among the slew of announcements from the Bank of England tomorrow.

The central bank is preparing for Super Thursday in will it publish not only its latest interest rate decision (a reversal of its post-Brexit vote 0.25% base rate cut is possible), but minutes from its last meeting and its quarterly Inflation Report as well.

Woolnough, manager of the £19 billion M&G Optimal Income fund, said the Bank’s panicky cut in interest rates to a new low of 0.25% a year ago was also accompanied by increased funding lines for banks and the reintroduction of purchases of government and corporate bonds. 

The measures had helped, with unemployment remaining low and growth remaining positive, said Woolnough, although he added the bond purchases - which are designed to lower long-term market expectations of interest rates - were disproportionate when compared to the response to the 2008 collapse of US investment bank Lehmans.

Post-Lehmans corporate bond purchases topped £2.3 billion between November 2008 and November 2009 but post-Brexit, they were more than four times this amount, totalling £10 billion between June 2016 and August 2017.

Woolnough said the reliance on bond purchases ‘was due to fears that companies would not be able to fund themselves and financial dislocation would occur’.

‘Partly as a result of the Bank’s emergency actions, markets fortunately remained firmly open – here and abroad – for UK companies,’ he said.

‘The Bank is in agreement that aggressive emergency measures are no longer necessary; it has completed and ceased its corporate bond buying programme, and recently committee members at the Bank have been advocating the reversal of the ‘emergency’ rate cut of 2016,’ he said. ‘A reversal of policy appears to be on the cards.’

However, Woolnough said an increase in the base rate of 0.25%, back to 0.5%, is ‘not that dramatic’ and investors should instead pay attention to an unwinding of the corporate bond buying programme as it could depress loan prices in the short term.

‘From a corporate bond perspective, however, selling the corporates back to the market could potentially weigh on the performance of sterling corporate bonds held by the Bank,’ he said.

‘During the great financial crisis the Bank bought bonds from March 2009 and completed selling them back to the market by April 2013. This time round they bought them in a seven-month window from September 2016 to April 2017. Will the Bank now sell these holdings and if so, when?...I think they will,’ said Woolnough (pictured below).

While selling back the bonds would disrupt the market temporarily, ultimately it would restore it to a healthier position, especially as the Bank was keen to tighten policy and avoid a credit boom getting out of hand.

‘One way to solve this is to let the private sector fund corporate debt, having been potentially crowded out of that option by the Bank’s significant corporate bond buying programme,’ he said.

The National Institute of Economic and Social Research (NIESR) has meanwhile brought forward its prediction of timing of the next interest rate hike by the Bank of England to the first three months of next year. Previously it had not expected a rate rise until the second quarter of 2019.

It is expecting inflation, as measured by the consumer price index, to increase from 2.7% in the second quarter of this year to 3% in the final quarter before easing back to the target rate of 2% in the last three months of 2019.

'Our forecast for CPI inflation however, is lower compared with that in our May review because the outturn for the second quarter was weaker than our forecast,' it said. 

'Notwithstanding the downward revision to the inflation forecast, we have brought forward the timing of the Bank rate hike.'

It added that the rate hike should not be viewed as a 'tightening in policy' but as a 'modest withdrawal of some of the additional stimulus that was injected into the economy after the EU referendum'.

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