If the Bank of England does start to buy up corporate bonds, as Mervyn King hinted last week, then those purchases are likely to target investment-grade non-financial issues, according to Morgan Stanley analysts.
This is important because, as they see it,
Deployed against the £ corporate bond market, even a fraction of £50 billion could be a very significant figure indeed.
The analysts, led by Andrew Sheets, believe the BoE would initially focus on UK corporates - not too large a leap of interpretation - and that it would concentrate on issues denominated in sterling.
To wit,
The iBoxx £ Corporate index, a proxy for liquid £-denominated IG bonds, currently has a market value of around £225 billion. But cut out financial paper, and the paper of non-UK based companies, and we estimate that the market shrinks to just £45 billion by market value. In this context, even a fraction of the £50 billion facility could be very significant indeed. ‘Buy what the Fed is buying’ is simple but effective advice from our colleagues in rates strategy. We do not wish to avoid it here.
Related links:
Clarity on QE at the BoE. Or not. - FT Alphaville
