BoE mulls corporate bond sales to boost market liquidity

The Bank of England is consulting on changes to its asset purchase scheme that would allow it to sell, as well as buy, corporate bonds to improve secondary market liquidity, it said on Thursday.

The BoE has been buying small amounts of corporate bonds since March as part of its 200 billion pound quantitative easing scheme, but it noted on Thursday that trading conditions in the secondary market were still restricted.

It said it aimed to launch the revamped scheme as soon as possible in 2010.

“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,” the BoE said.

The central bank said its holdings of the securities would vary in line with market demand and it was not targeting any particular portfolio size.

It added that if its corporate bond portfolio was reduced while the Monetary Policy Committee’s programme of asset purchases continued, it would be offset by greater purchases of gilts.

However, analysts said the impact would be small since corporate bonds account for a tiny fraction of the BoE’s QE asset purchases. Almost 99 percent of the BoE’s QE purchases so far have been gilts, with purchases of commercial paper and corporate bonds accounting for the remainder.

“The BoE’s holdings of corporate bonds are tiny,” said Mohit Kumar, head of sterling fixed income strategy at Deutsche Bank. “It’s interesting that they are doing this, but I view it simply as a liquidity measure.”