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Woolnough predicts BoE will start selling back corporate bonds

Woolnough predicts BoE will start selling back corporate bonds

Blockbuster fund manager Richard Woolnough is factoring in the sale of the Bank of England’s corporate bond holdings back to market in the near to mid term.

In a blog piece, the manager of the £19.9 billion (€21.8 billion) M&G Optimal Income fund said the rationale set out by the central bank one year ago to justify wading into the credit markets is no longer valid.

‘The Bank of England 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.

‘This is in stark contrast to this time last year when the Bank had a bias towards easing. A reversal of policy appears to be on the cards,’ Woolnough said.

Woolnough moved to negative duration on the UK for the first time in his giant fund last September and told Citywire he was increasing this position earlier this year.

Sellers’ market

In his note, Woolnough said a meaningful policy response for the UK would require something more than changing its rates stance. ‘From a rate perspective, removing the quarter point cut is not that dramatic as the conventional policy response was limited last year.

‘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. ‘Will the Bank now sell these holdings and if so, when? In answer to the first question, I think they will.’

Woolnough pointed to the post-2008 scenario where the only serious policy measure was the unwinding of emergency measures based around buying gilts. He therefore questioned why a move on corporates wouldn’t have the same effect this time.

‘Indeed we have a situation where the Bank wants to potentially tighten policy, the need for emergency funding appears low, and in fact the Bank has been arguing recently that lending conditions are getting too lax from a prudential perspective.

‘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 added.

On a one-year basis to the end of July 2017, the M&G Optimal Income fund returned 8.1% compared to a 4.8% rise by its peer group.


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