Financial Market

Where to now for the UK and global financial system?

Following the Bank of England’s intervention into the UK bond market to prevent a financial crash, centred on pension funds, the big question hanging over the British and global financial markets is what happens when the emergency program ends.

The BoE committed itself to spending £65 billion—£5 billion a day for 13 days until October 14—on long-dated UK government debt, that is, 10-year and particularly 30-year bonds, so-called gilts.

Liz Truss speaks after winning the Conservative Party leadership contest at the Queen Elizabeth II Centre in London on September 5, 2022. [AP Photo/Alberto Pezzali]

Over the weekend, the Financial Times (FT) reported that regulatory authorities responsible for the £1.5 trillion pensions sector, which came close to imploding, “have been holding daily talks with asset managers to stave off a fresh crisis” when the emergency bond-buying finishes.

The crisis erupted when pension funds, which match their income and asset holdings with their liabilities and make heavy investments in gilts to do so, were met with “margin calls”—demands for increased collateral to back the loans they had taken out to buy derivatives to balance their books as bond prices fell.

The pension funds started selling bonds, lowering their price, to raise cash to meet the margin calls. This threatened to set in motion a “doom loop,” with the fall in bond prices leading to a demand for further collateral, prompting more selling, lowering prices still further, and a demand for yet more collateral.

Had the crisis continued, an estimated 90 percent of pension funds could have become insolvent.

The BoE issued a statement that the “scale and speed” of the shift “far exceeded historical moves.”

Last Wednesday, the 30-year gilt yield rose at one stage by 1.27 percentage points because of the fall in bond prices (the two move in opposite directions) before coming back down after the BoE intervention. This single day movement was greater than the annual range in all but four of the past 27 years.

The head of UK rates strategy at the banking giant HSBC, Daniela Russell, told the FT the BoE bond purchases were a “sticking plaster” to buy time. There was a possible “cliff edge” when the intervention ended and the central bank might have to offer more support.

The newspaper reported that in the rush to raise cash, pension funds had been selling stocks and bonds, with some seeking bailouts from their corporate financial backers.

Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button

Get our latest downloads and information first. Complete the form below to subscribe to our weekly newsletter.

    Input this code: captcha