August 23, 2016 / 3:41 PM / a year ago

CORRECTED-UK corporate bond issuance soars ahead of BoE purchases

3 Min Read

(Corrects the source of sterling-denominated bond trading volume in penultimate paragraph)

By Jamie McGeever

LONDON, Aug 23 (Reuters) - Issuance of sterling-denominated UK corporate bonds has risen nearly 15-fold ahead of the Bank of England including them in its bond-buying stimulus programme designed to stave off a Brexit-led economic slowdown, according to Thomson Reuters data.

The UK corporate bond universe is small compared to other developed corporate bond markets, particularly the United States, but firms have ramped up issuance before the BoE's planned entry into the market next month.

They have taken advantage of a plunge in borrowing costs since Britain's vote on June 23 to leave the European Union and the BoE's aggressive policy easing in response earlier this month.

The average yield on triple-A rated UK company bonds fell below 1.4 percent earlier this month, tracking a steep fall in the benchmark 10-year sovereign debt yield to a record low 0.5 percent, from nearly 1.4 percent before the Brexit vote.

Sterling-denominated corporate issuance has totaled 4.45 billion pounds ($5.9 bln) so far this month, a near 15-fold rise from 297 million pounds in August last year, Thomson Reuters data showed. And there are still five UK business days left in August.

The number of deals has risen to seven from one, while trading in the secondary market has also increased.

"The recent uptick in issuance should peter out if the surge in August was Brexit-related," said Tomas Hirst, European credit strategist at CreditSights.

"But firms will probably issue a little more than they otherwise might if the BoE wasn't about to come into the market. The funding environment is positive and there are tailwinds," he said.

To counter the anticipated economic slowdown following the Brexit vote, the BoE announced on Aug. 4 that it would revive its quantitative easing bond-buying programme.

Its decision to include corporate bonds in the expanded asset purchase scheme prompted the surge in issuance in what is traditionally the slowest month of the year, although it remains a relatively small market.

HSBC analysts note that 71 percent of UK company funding comes from loans, and of the 29 percent that does come via bond issuance far more is issued in euros and dollars than sterling.

Around 150 billion of UK company bonds could be eligible under the scheme, out of a total universe of 400 billion outstanding.

The traded volume of sterling-denominated UK corporate bonds observed by market data and post-trade service provider Trax has also risen but not by as much. The average daily volume so far this month is 355.5 million pounds, compared with 262.5 million pounds a year ago.

Trax, which provides post-trade services for around two thirds of all fixed income transactions in Europe, is a subsidiary of MarketAxess.

$1 = 0.7586 pounds Reporting by Jamie McGeever; Editing by Susan Fenton

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