UK corporate bonds sold off on Thursday after the Bank of England raised interest rates and unexpectedly announced its decision to sell off its small stock of corporate debt entirely.
The BoE’s asset purchase programme, introduced in 2016, allows the bank to buy sterling-denominated bonds from companies “deemed to be making a significant contribution to UK economic activity”. The list also includes bonds from several foreign companies, from Apple to EDF.
Yields on some of the bonds eligible for the BoE program, including British American Tobacco, EDF, E.ON, Clarion Housing, Yorkshire Water and GlaxoSmithKline, rose 5 to 15 basis points on the day across various maturities, according to Refinitiv and MarketAxess prices.
Movements on many individual bonds, however, were smaller than on UK government bonds, known as gilts, whose yields rose sharply.
The decision is not expected to have much impact on the broader market, given that the BoE’s holdings of corporate bonds stand at some £20bn, compared to £875bn of gilts.
But while the BoE said the move was not a signal about the future of gilt sales, many analysts saw it as reflecting the bank‘s intention to phase out monetary easing.
“The announcement of the unwinding of corporate bond purchases will increase the pressure and focus on the unwinding of Gilt’s purchases when interest rates hit 1%,” said Edward Hutchings, head of rates at Aviva. investors.
“It may well be sooner than most investors initially thought and we may well see gilt yields rise further from here.”
The BoE, which will start unwinding its holdings of gilts as they mature, repeated its plan to actively sell gilts once its policy rate hits 1%.