The Bank of England published a consultation paper on Thursday morning discussing the possibility of extending the Bank’s Asset Purchase Facility scheme for corporate bonds to allow sales as well as purchases.
Ostensibly this is a scheme to help market making banks lower the liquidity premium on corporate bonds by being able to tap the Bank of England’s supply.
So far, so uninteresting.
But importantly, this would allow the Bank to begin to offload some of the holdings amassed under the APF without (hopefully) scaring the horses.
In short, Thursday’s paper could be interpreted as the first step towards the Bank’s withdrawal from quantitative easing.
According to the paper:
The focus of the Corporate Bond Secondary Market Scheme is to facilitate market-making by banks and dealers, to help to reduce liquidity premia on corporate bonds, and so remove obstacles to corporate access to capital markets. Since the launch of the Scheme, conditions in the sterling corporate bond primary market have improved. However, trading conditions in secondary markets continue to be somewhat restricted. The changes proposed today are aimed at improving secondary market liquidity by the Fund operating as a seller, as well as a buyer, of bonds.
This, as Evolution’s Gary Jenkins notes, appears to be a very shrewd move by the BoE.
If they had just announced they were thinking of selling, then this could have reversed some of the positives of the scheme, by suggesting they will be available as both a buyer and a seller they can choose to reduce the size of their portfolio / support as they wish without spooking the market.
And by keeping the option to buy, the Bank has not closed the option of increasing QE if market conditions, and the economy, make an extension of the APF necessary.
A Bank spokesman however stressed:
The proposals have no implications whatsoever for the wider asset purchase programme being undertaken in line with the MPC’s decisions about the overall quantity of asset purchases. That programme was extended by £25 billion to a total of £200 billion on 5 November. The proposals today are entirely aimed at further improving liquidity in the corporate bond market and facilitating market making. Any corporate bond sales would be offset.
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