BoE stress tests: all you need to know

The Bank of England has released the results of its latest round of its annual banking stress tests and its semi-annual financial stability report this morning. Used to measure the resilience of a bank’s balance sheet in adverse scenarios, the stress tests measured the impact of a severe slowdown in Chinese growth, a global recession […]

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Draghi: Eurozone will decline without vital productivity growth

It’s productivity, stupid. European Central Bank president Mario Draghi has become the latest major policymaker to warn of the long-term economic damage posed by chronically low productivity growth, as he urged eurozone governments to take action to lift growth and stoke innovation. Speaking in Madrid on Wednesday, Mr Draghi noted that productivity rises in the […]

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Asia markets tentative ahead of Opec meeting

Wednesday 2.30am GMT Overview Markets across Asia were treading cautiously on Wednesday, following mild overnight gains for Wall Street, a weakening of the US dollar and as investors turned their attention to a meeting between Opec members later today. What to watch Oil prices are in focus ahead of Wednesday’s Opec meeting in Vienna. The […]

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Banks, Financial

RBS emerges as biggest failure in tough UK bank stress tests

Royal Bank of Scotland has emerged as the biggest failure in the UK’s annual stress tests, forcing the state-controlled lender to present regulators with a new plan to bolster its capital position by at least £2bn. Barclays and Standard Chartered also failed to meet some of their minimum hurdles in the toughest stress scenario ever […]

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Barclays: life in the old dog yet

Barclays, a former basket case of British banking, is beginning to look inspiringly mediocre. The bank has failed Bank of England stress tests less resoundingly than Royal Bank of Scotland. Investors believe its assets are worth only 10 per cent less than their book value, judging from the share price. Although Barclays’s legal team have […]

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Categorized | Capital Markets

BoE to buy corporate debt in QE round

Posted on September 27, 2016

Commuters pass the Bank of England (BOE) in the City of London, U.K., on Tuesday, Sept. 13, 2016. BOE officials announce their next interest rate decision on Thursday, when they are forecast to keep policy unchanged as they assess the outlook for the economy since the Brexit vote. Photographer: Luke MacGregor/Bloomberg©Bloomberg

The Bank of England has warned on UK financial stability after the Brexit vote

The Bank of England will start buying corporate bonds on Tuesday when it launches its latest version of quantitative easing aimed at boosting the private sector.

The bank will conduct three “reverse auctions” this week, each aimed at buying the bonds from particular sectors. Tuesday’s auction focuses on utilities and industries. Individual companies include automaker Rolls-Royce, oil major Royal Dutch Shell and utilities such as Thames Water.

    However, the corporate bond buying scheme faces a market overshadowed by the much deeper pools of capital in the US and eurozone as well as companies that may delay investment plans as they contend with the uncertainty over Britain’s future relationship with the EU.

    “There’s a fair amount of scepticism in the market about how much they’ll be able to achieve,” said Srikanth Sankaran, head of credit strategy at Morgan Stanley. “They have a relatively low bar to clear.”

    He said that one thing to watch out for is what price they have to pay for longer-dated corporate bonds. Much of the demand for sterling bonds comes from insurance and pension funds. As they match long-term liabilities with fixed returns from owning long-dated bonds, they will probably seek a higher price in return for selling such paper to the BoE.

    The Bank of England intends to buy £10bn of corporate bonds over the next 18 months. Only the debt of companies that “make a material contribution to economic activity in the UK” is eligible.

    However, the list of eligible bonds includes a sizeable — and controversial — presence of foreign companies’ debt including US technology business Apple and fast-food chain McDonald’s.

    The initial impact of the scheme’s announcement was to lower bond yields, which fall as prices rise. The effective yield on debt included in the Bank of America Merrill Lynch sterling corporate index fell from around 2.5 per cent to a record low of 2.06 per cent shortly after the plan was announced on August 4 — however, they have since rebounded back to 2.2 per cent.

    The policy has already unleashed a wave of new bond sales in what has previously been a quiet market; earlier this month the National Grid sold £3bn worth of bonds, the largest ever sterling deal, while phone business Vodafone sold two bonds within the space of a week, just to take advantage of a fall in yields following the programme’s announcement.

    “Before the announcement, it looked likely that we would see a net decline in issuance,” said Ketish Pothalingham, a portfolio manager at PIMCO. He said that as well as helping the so-called primary markets it had also boosted trading of outstanding bonds as there was now “some sense of a buyer of last resort being in the market”.