Business | Opinion
It's looking brighter on the bond front
Since the Bank of England (BoE) launched its programme of quantitative easing a few months ago, it has bought the better part of £100 billion (Dh596 billion) of government securities - not just a staggering amount but also unprecedented.
- By Anthony Hilton, Evening Standard
- Published: 23:02 July 12, 2009
Since the Bank of England (BoE) launched its programme of quantitative easing a few months ago, it has bought the better part of £100 billion (Dh596 billion) of government securities - not just a staggering amount but also unprecedented. And, Britain being the country it is, the more the money pours out, the more doubts are expressed about the programme.
Some say it is distorting the market, particularly in those stocks where the BoE has bought the bulk of the outstanding issue. Others say, perhaps more pertinently, it is not working because there is no sign the banks are lending on the vast sums of money they are receiving for selling their gilts. Others say it is a waste of time because most of the sellers are foreign institutions, which are not going to recycle their funds into the British market.
All this rather misses the point. BoE Governor Mervyn King (pictured) has said on several occasions that quantitative easing is designed to increase the money supply, not directly to boost bank lending. The amount by which the latter may or may not increase should not be the measure by which its success is judged.
What is apparent, and acts in the governor's favour, is the dramatic improvement in credit conditions overall. Bank lending may still be scarce, though this may largely be because so many foreign banks have withdrawn from the market, rather than the British banks cutting back, but there has been a dramatic improvement in the bond markets, not just in the prices but in the appetite for new issues. Given that the bond markets are the other main source of debt for UK companies, this is clearly good news.
Note what has happened to prices. Bank tier one debt has in many cases doubled from its lows of last March. A UBS bond maturing in 2013 was 33.50 then, but is 79 now. Lloyds TSB's 2019 issue has recovered from 49 to 81 while a similar Bank of America 2018 issue has gone from 33 to 82.
Among secondary issues where the fear was less marked than in banks, it has been a similar but less dramatic story. Rentokil 2016 bonds have gone from 67 to 85, International Power from 65 to 80 and even troubled ITV from 63 to 81. These moves signal a major return of confidence.
The result has been a surge in new issues, with more money raised so far this year more than ¤400 billion than in the whole of last year. Even more interestingly, the market is open to all, not just the bluest of blue chips, so the quality is dropping.
There have been seven or eight high-yield issues this year, whereas last year there were none. Conditions, particularly for some of the more popular stuff, have been described by some market participants as a buying frenzy.
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