Credit Bubble Bulletin2020-05-20T17:01:05-06:00

Presented by Doug Noland

Weekly Commentary

September 30, 2022: A Threatening Turn

Global de-risking/deleveraging has taken A Threatening Turn. It’s no exaggeration to write that the UK pension system was this week at the brink of spectacular collapse, with confidence in policy and market function hanging in the balance.

September 28 – Reuters (David Milliken, Carolyn Cohn, Sachin Ravikumar and Dhara Ranasinghe): “The Bank of England stepped into Britain’s bond market to stem a market rout, pledging to buy around 65 billion pounds ($69bn) of long-dated gilts after the new government’s tax cut plans triggered the biggest sell-off in decades. Citing potential risks to the stability of the financial system, the BoE also delayed… the start of a programme to sell down its 838 billion pounds ($891bn) of government bond holdings, which had been due to begin next week. ‘Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,’ the BoE said. ‘This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.’”

While not mentioned specifically in the Bank of England (BOE) statement, various reports pointed to massive pension system margin calls and a resulting disorderly UK government bond (“gilts”) market. From the FT: “‘At some point this morning I was worried this was the beginning of the end,’ said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts. ‘It was not quite a Lehman moment. But it got close.’”

From Bloomberg: “The size of the LDI (liability-driven investing) market has exploded over the past decade. The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has tripled in size to £1.5 trillion ($1.7TN) in the 10 years through 2020.” (more…)

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