Prime Minister Kwasi Kwarten’s mini-budget has led to an ‘unprecedented’ crash in the UK bond market, according to the Bank of England, as pension funds that manage billions of dollars on behalf of retirees across the UK collapsed. It is said that it was on the verge.
The central bank last week laid out emergency interventions to calm financial market turmoil, putting ‘many’ of pension funds investing more than £1 trillion at risk of bankruptcy, putting them under severe strain. said to be exposed.
The bank said interest rates on long-term UK government bonds rose dramatically in the days immediately after the prime minister’s mini-budget triggered a ‘self-reinforcing’ spiral in bond markets, jeopardizing the stability of the UK’s financial system. rice field.
Without the World Bank intervening in its promise to buy up to £65bn of government bonds, funds managing money on behalf of pensioners across the country would be left with “negative net asset values” and unable to meet their cash needs. I don’t think so.
“As a result, these funds will likely have to start the liquidation process the next morning,” the bank said.
The central bank said there was a risk that the meltdown would spill over into the UK’s financial system, which could have caused an “excessive and sudden tightening of funding conditions for the real economy”.
Threadneedle Street stepped in last week after the pound fell to an all-time low against the dollar and interest rates on British government bonds climbed to their highest levels since the 2008 financial crisis.
In a letter to the Commons Finance Committee outlining the intervention, the bank’s vice governor for financial stability, John Cunliffe, suggested that the biggest market moves came after the prime minister’s mini-budget.
On Thursday, Sept. 22, the day banks raised interest rates, he said the currency was “broadly stable” and long-term interest rates, or yields, on government bonds had risen by about 20 basis points. It wasn’t until a day after Kwarten announced his £45bn outstanding tax cut that World Bank market intelligence identified pension fund managers’ initial concerns.
Cunliffe said the pound fell about 4% against the dollar and 2% against the euro while long-term bond yields were in a “very bad” situation with the number of buyers and sellers ready to trade on the day. It was up 30 basis points, he said.
Ministers attempted to argue that the market turmoil reflected global factors. We published a chart highlighting the steep rise in costs.
Citi sources warned last week that a “doom loop” had emerged for pension funds invested in debt-driven investments (LDIs). The fund invested in complex derivatives using long-term government bonds as collateral. The assets were pledged as collateral to back financial contracts.
Amid the post-mini-budget market turmoil, the value of UK government bonds fell sharply as investors began to lose confidence in the credibility of the Truss government to implement sustainable tax and spending policies. This meant yields moved inversely to bond prices, reflecting rising government borrowing costs.
As a result, pension funds invested in the LDI scheme faced rolling margin calls as the value of the bonds they pledged as collateral collapsed. The fund then began selling other long-term bond holdings to meet its cash needs, which put further selling pressure on the bond market in a self-reinforcing downward spiral.
Cunliffe said the bank had received information that the fund was preparing to sell at least £50bn of long-term government bonds in the short term.
In the period just before the World Bank intervened, UK 30-year government bond yields rose 35 basis points in two days. Data going back to the turn of the century showed the largest daily gain until last week was 29 basis points.
Measured over four days, the increase was more than double the largest move since 2000. The move came during a “dash for cash” at the start of his Covid-19 pandemic, when global financial markets plunged into one of the world’s financial markets. The worst meltdown since the Wall Street Crash of 1929.
On Thursday night, a spokesperson for the Treasury Department said the turmoil was a global problem, saying: “While we have seen turmoil in the UK, global financial markets have also experienced significant volatility in recent weeks. ‘ said.
They added: Our growth plan unlocks growth and makes the UK more competitive.
“The government is committed to tightening fiscal discipline and reducing debt as a percentage of GDP over the medium term.