Bank of England offers more support to pension funds amid crisis

The moves failed to calm the markets, with UK 30-year bond yields, as government bonds are known, jumped to 4.64% from 4.39% on Friday. Outside of the past two weeks, these moves are unusually large for a single day.

Bank of England Launched the first foray into the markets on September 28 when it offered to buy up to £5 billion, or about $5.55 billion a day, in long-term government bonds. The program was intended to stem the damage caused by the furious sale of British government debt over the previous days in the aftermath A surprise package of tax cuts announced by the government.

“The key message is that there is very little risk mitigation so far,” said Antoine Buffett, chief interest rate strategist at ING. “There is a message to pension funds and potential sellers that the window is closing and they need to hurry.”

He attributed the bond sale on Monday to the disappointment of investors who had expected the Bank of England to extend its bond-buying facility.

The original intervention in late September initially calmed markets, with government bond yields tumbling in response. But yields have jumped again in recent days after the bank appeared to be buying well under £5 billion a day, a possible sign that the program is not working as intended.

In the history of crisis interventions, central banks often have to make multiple attempts to solve problems with different types of bond buying or lending programs before markets become convinced that a viable pillar has been created. During the Covid-19 crash in March 2020, the Federal Reserve expanded its lending programs several times before restoring calm.

The Bank of England said it would increase the daily amount of purchases on offer until the program ends, starting at £10 billion on Monday, although it was unclear whether troubled sellers would be accepted.

The lending programs announced on Monday included what the Bank of England called an Extended Temporary Repo Facility. It lends this cash to pension funds in exchange for an expanded list of collateral previously available to pension plans, including index-linked government bonds, whose returns are linked to inflation, and corporate bonds.

Operations will be handled by banks operating on behalf of pension funds. The Bank of England has also made existing and permanent repo lending facilities available to banks operating to assist pension fund clients.

The crisis is concentrated in a corner The market known as LDIsor commitment-driven investments. LDIs have become popular in recent years among UK defined benefit pension plans To earn enough money in the long run to match what they owe to retirees. These strategies use financial derivatives linked to interest rates.

LDIs also contain leverage, or borrowing, which inflates a pension fund investment by as much as six or seven times. When the yield on long-term UK government bonds supporting LDI investments rose more than ever in a single day at the end of September, LDI fund managers asked pension funds to post huge sums of new guarantees to back the investments.

To generate this guarantee, pension funds would sell bonds, stocks, and other investments other than LDI.

In a letter to lawmakers last week, BoE Deputy Governor John Cunliffe said the bank had acted to stop forced selling by LDI investors and a “self-reinforcing downward price spiral”.

The goal of the new lending and bond-buying programs is to make it easier for pension funds to raise cash so that they can pay leverage on their LDI funds without causing wider market turmoil.

Ben Gould, Chief Investment Officer, said:

XPS Pension GroupAnd the

UK Pensions Advisor. He said the measures help the funds avoid having to sell assets at shoddy prices.

Mr Gold estimates it will take between £100 billion and £150 billion for the industry to back up its guarantees on the LDI funds.

“I estimate we may be about halfway through,” he said. “There is still a lot of activity to be done before October 14.”

Rising inflation and expectations of inflated government bond issuances have pushed bond yields up sharply in recent months. Investors in British government bonds were restless The tax cuts announced by Prime Minister Liz Truss’ government were partly because they were not accompanied by a familiar analysis of the impact on borrowing by the independent budget watchdog.

British Chancellor of the Exchequer Kwasi Quarting said Monday that he will announce further budget-related measures on October 31 which will be accompanied by forecasts from the Office of Budget Responsibility, which provides an independent analysis of government spending. He previously said that wouldn’t happen until November 23.

—Caitlin Ostrov contributed to this article.

write to Paul Hannon at [email protected], Chelsea Dolaney at [email protected] and Julie Steinberg at [email protected]