December 9, 2022

Raven Tribune

Complete News World

Turmoil returns to the UK bond market

Turmoil returns to the UK bond market

To protect — or hedge — against changes in interest rates, pension funds use complex financial contracts called derivatives. The value of these derivatives is linked to gold. The initial sell-off in Treasuries in September, in response to the government’s plan for tax cuts, was so fast and sharp that the hedge’s value plummeted. Because of the way derivatives are regulated, the drop in their value has led to calls from market participants on the other side of those deals for more collateral to cover losses.

Surprised at the speed of this move, pension fund managers began selling other assets, including gold bonds, to raise cash needed to cover collateral requests. These sales only exacerbated the situation, as a result of which gold prices fell.

The sell-off forced the Bank of England to intervene to restore stability to the bond market, and to start a short-term gold bond purchase program on September 28. At the time, the central bank said it would halt its purchases on Friday, which it hoped would give pension funds enough time to consolidate guarantees and stabilize.

However, the pension fund industry is usually slow-moving, and selling assets, as well as transferring cash for collateral, can take some time. Some asset managers said that as of last week, they still had pension fund clients withdrawing their funds as they sought to raise more cash.

Realizing that investors remain concerned about Friday’s deadline, the Bank of England on Monday announced additional support measures, including purchases of inflation-linked bonds and a temporary facility that would provide short-term loans to banks in exchange for government bonds.

See also  Oil nervous as market pressures OPEC to fill supply gap in Russia

As of Tuesday, the central bank had spent nearly £7 billion on bond purchases, well below the potential £65 billion it had made available over the life of the program. The central bank also spent nearly £2 billion on inflation-linked bond purchases, part of Monday’s expanded allocation as it said it would buy up to £5 billion a day for the rest of this week.

Convinced that this should be enough, central bank chief Andrew Bailey said on Tuesday that the Friday deadline was still in place, telling pension funds directly that they had “three days left”.