To get an idea of the potential impact of the Bank of England’s £10bn corporate bond buying programme, look no further than Vodafone.
On Friday the telecoms giant issued the first sterling corporate bond since the BoE unveiled its new stimulus package. Thanks to the boost the BoE’s bundle of goodies delivered, Vodafone managed to issue a £1bn 40-year bond that yields substantially less than the 33-year bond it issued only a few days ago.
Amid strong demand, Vodafone managed to slash the yield of the 40-year bond by 18 basis points from initial guidance to 3.01 per cent, according to BNP Paribas, one of the banks on the deal.
That’s 39bps lower than the yield on the £800m 33-year bond it issued on Monday, writes Joel Lewin.
Even that elevated 3.4 per cent yield was a record low of sorts- it was the lowest ever achieved by a triple B-rated sterling issuer at a maturity of 30-years or more.
As investors raced to get into the market ahead of the BoE, the orders flooded in for Vodafone’s deal, culminating in a total orderbook of £3bn, three times larger than the final deal size.
The BoE’s announcement coincides with the largest weekly inflow ($9.2bn) into global investment grade corporate bond funds in almost two-years, since October 2014.
Before this week Vodafone hadn’t issued a sterling bond since 2009, but now it has enjoyed two record breaking visits to the market in the space of a few days.
That’s hardly surprising given how hard its brand new 33-year year bond rallied yesterday, with its yield diving 42bps since the BoE meeting to 2.96 per cent.
The BoE hopes its “purchases could stimulate issuance in sterling corporate bond markets,” and judging from today the early signs are positive.
But the market is a shadow of its former self. Year to date issuance is at an 11-year low of £9.2bn, down more than a half from the same period last year, and just a fifth of the volume seen in 2009.
In 2009, UK companies had 50 per cent of their outstanding corporate bonds denominated in sterling, notes BAML.
That has since dwindled to 28 per cent as the euro and the US corporate bond markets have lured UK companies away with more favourable conditions.
But since the BoE unveiled its bundle of goodies, sterling corporate bond yields have dropped to a record low 2.25 per cent, while sterling spreads have closed the gap on their euro and US counterparts. All of this should help rekindle interest in the sterling bond market.
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