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* Borrowers print £5.5bn on BoE news
* Issuance boom sees spreads sag
* Investors turn to long end for yield
By Laura Benitez and Helene Durand
LONDON, Aug 12 (IFR) - Sterling bond issuance has boomed since the Bank of England announcedstimulus measures last Thursday, but the weight of new supply has put pressure on spreads andthe rally could already be running out of steam.
Corporates and financials have sold just over £5.5bn of bonds since last Thursday'sannouncement, accounting for over 20% of total sterling issuance so far this year. But newissues are up to 8bp wider.
"It's no surprise that the rally has ended - even if it's only a temporary halt - spreadsrallied too hard too fast," one investor said.
Since the BoE announced it would start buying corporate bonds in September, the sterlingnon-financials iBoxx index has tightened by over 29bp and was quoted at 168bp at midday onFriday.
Vodafone's £1bn 3% 40-year deal, which printed the previous Friday, was bid 8bp wider a weeklater, at 176bp over Gilts, according to Tradeweb.
Similarly, BMW's 0.875% £600m August 2022 paper, which priced on Monday, had widened 7bp byThursday, while BP's 1.177% seven-year trade from Monday widened 4bp.
Syndicate bankers attributed some of the underperformance to the BoE's failure to buy allthe Gilts it wanted at a reverse auction on Tuesday as investors refused to part with theirlonger-dated bonds.
"While there is still a demand for sterling, the question is the price; we have alreadystarted to see some push back on some of the sterling financial deals priced this week," onesyndicate banker said.
"There is still some deep demand from specific funds. The problem is that the investor baseon the sterling side is very thin, so you have to be careful how much you push the pricing."
STERLING BONANZA
The sterling primary bond market typically dries up over the summer as many corporates arein close periods ahead of reporting earnings, while some are simply put off from raising newdebt for fear that investors are away from their desks.
But the BoE's corporate bond purchase announcement gave the market a sudden summer urgency,with expectations that £150bn of bonds are likely to be eligible under its corporate bondpurchase scheme out of a total universe of some £400bn outstanding.
HSBC, BNP Paribas, BMW and BP took full advantage of positive momentum earlier in the week,following on from issues last week by Barclays and Vodafone.
"Issuance for most of the year had been at historical lows but it doesn't take a lot tochange that and that's what we're seeing right now," said Marco Baldini, head of European bondsyndicate at Barclays.
"QE is a real game-changer and investors simply can't run the risk of running underweight insterling credit."
Despite the week's underperformance in sterling credit spreads, a research note by BNPParibas said there is the potential for the market to grind tighter, especially as the marketedges closer to the start of purchases in mid-September.
YIELD HUNT
The BoE's intervention has also seen investors move away from intermediate sterling creditand turn to the long end in a desperate attempt to source yield.
The long end of the sterling curve has struggled over the past two years due to changes inpension legislation structurally lowering the demand for duration, wrote Matthew Bailey, aEuropean credit analyst at JP Morgan in a research note.
"In our view, curve steepening in sterling has now run its course ... the global'search-for-yield' in investment-grade fixed income is back, with investors buying anything witha positive carry ... we recommend increasing exposure to long-dated sterling credit."
Some long-end deals have already performed phenomenally well. Electricite de France's £1.3bn2114s are now up nearly 30 price points at a 172 cash price since the BoE announced itsprogramme.
David Riley, head of credit strategy at BlueBay Asset Management said further tighteningcould be on the horizon in the coming weeks, which would in turn reduce the sterling premium -in spread terms - over euro-denominated investment-grade corporate credit to its pre-Brexitreferendum level.
"With euro and now sterling corporate bond yields and spreads compressing on the back ofcentral bank buying, we believe the global search for yield that is boosting the emerging marketdebt and US credit markets will if anything intensify," Riley said.
(Reporting By Laura Benitez, editing by Matthew Davies and Robert Smith)
