With a post-referendum crisis averted and base rate hikes on the horizon, the Bank of England could start to sell its corporate bond holdings, according to M&G’s Richard Woolnough. 
FE Alpha Manager Woolnough (pictured), lead manager on the several of the firm’s large corporate bond funds, said easing measures introduced by the central bank last year appeared to have paid off.
He said the Bank of England measures, including further bond purchases and lines of liquidity for banks, had kept the economy afloat.
“They were very concerned regarding a potential slowdown and collapse in both the economy and corporate confidence and so implemented a variety of measures; reducing interest rates, increasing liquidity lines for banks, and reintroducing their gilt and corporate bond purchase programmes,” he said.
“Since then, growth has remained positive, and unemployment has continued to be low. The measures appear to have helped.”
Indeed, UK GDP has continued to grow, albeit at low levels, since the EU referendum. The most recent estimate from the Office for National Statistics shows that UK GDP grew by 0.2 per cent between Q4 2016 and the first quarter of 2017.
However, with the base rate near zero, the central bank “leaned more heavily on non-conventional monetary policy measures”.
The result was that the bank’s policy tools were more “unconventionally weighted”, said the bond fund manager.
Bank of England policy responses
Source: M&G
“The most notable feature is the disproportional purchase of corporate bonds this time around versus other measures; four times as much corporate quantitative easing has been undertaken compared to the Great Financial Crisis,” explained Woolnough.
“This was due to fears that companies would not be able to fund themselves and financial dislocation would occur.
“Partly as a result of the bank’s emergency actions, markets fortunately remained firmly open – here and abroad – for UK companies.”
However, Woolnough said the need for aggressive monetary policy and emergency measures has now lessened as the impact of the UK vote to leave the EU was not as pronounced.
The manager said while corporate bond spreads had widened in the immediate aftermath, they have now returned to pre-referendum levels.
Source: M&G
“Although they did widen on the shock Brexit vote, they have since returned to new post-financial crisis tights,” he said.
“The bank is in agreement that aggressive emergency measures are no longer necessary; it has completed and ceased its corporate bond buying programme, and recently committee members at the bank have been advocating the reversal of the ‘emergency’ rate cut of 2016.
“This is in stark contrast to this time last year when the bank had a bias towards easing. A reversal of policy appears to be on the cards.”
As a result, Woolnough now questions whether the central bank should begin selling the bonds back into the market as it considers further rate hikes.
“From a rate perspective, removing the quarter point cut is not that dramatic as the conventional policy response was limited last year,” he said.
“From a corporate bond perspective however, selling the corporates back to the market could potentially weigh on the performance of sterling corporate bonds held by the bank.”
He added: “During the Great Financial Crisis, the bank bought bonds from March 2009 and completed selling them back to the market by April 2013, this time round they bought them in a seven-month window from September 2016 to April 2017.
“Will the bank now sell these holdings and if so, when?”
According to Woolnough, the bank is likely to sell the bonds back into the market given the current conditions.
He said moves to tighten policy, less need for emergency funding and lax lending conditions had created conditions allowing for the sale of the corporate bond book.
Woolnough added: “Going forward there are still Brexit uncertainties, but one aspect perhaps less so: the Bank of England meetings will at some point not only be discussing the direction of interest rates, but when to sell its corporate bond holdings.”
Woolnough is lead manager of the M&G Strategic Corporate Bond, M&G Corporate Bond, and the M&G Optimal Income along with deputy manager Ben Lord.
The largest fund - £19.2bn M&G Optimal Income - has delivered a 13.53 per cent total return over three years, marginally ahead of the 13.44 per cent gain for its average IA Sterling Strategic Bond peer.
Performance of fund vs sector over 3yrs
Source: FE Analytics
The fund has a 2.2 per cent yield and has an ongoing charge figure (OCF) of 0.91 per cent.