Of course, an always enterprising "Wall Street" was there with a bevy of sophisticated strategies and derivative products to seemingly solve any problem. Years of zero rates forced pension fund managers to reach for yields, derivatives, and leverage to generate sufficient returns to match future obligations. are also facing margin calls."Īttention was this week focused on "liability-driven investment strategies" - or LDI: "A strategy used by pension funds to manage their assets to ensure they can meet future liabilities." And over recent years, an already challenging endeavor was made almost unworkable. 'What you start to see is a death spiral'… Some of the more than $1.8 trillion worth of corporate pension plans in the U.S. 'A vicious cycle kicks in and pension funds are selling and selling,' said Calum Mackenzie, an investment partner at pension-fund adviser Aon PLC. But the strategy faltered as interest rates surged and bond prices fell, forcing more selling and driving prices still lower. Pension funds adopted the so-called liability-driven investment strategy, or LDI, to address regulatory changes and help to close the gap between assets and liabilities. as pension funds needed to increase collateral. The strategy is resulting in more modest selling in the U.S. The Bank of England stopped the selloff exacerbated by heavy selling from U.K.
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September 29 - Wall Street Journal (Jean Eaglesham, Heather Gillers, Leslie Scism and Caitlin Ostroff): "A pension-fund strategy that aims to reduce volatility without lowering returns created the first crack in the financial system after one of the fastest jumps in interest rates in decades. 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." But it got close.'"įrom Bloomberg: "The size of the LDI (liability-driven investing) market has exploded over the past decade. 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. 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. 'This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.'" 'Were dysfunction in this market to continue or worsen, there would be a material risk to UK financial stability,' the BoE said. 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. 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.
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. Global de-risking/deleveraging has taken A Threatening Turn. 01, 2022 8:06 AM ET ACTV, AFMC, AFSM, AMER, ARKK, AVUV, BAPR, BAUG, BBMC, BBSC, BFOR, BFTR, BJUL, BJUN, BKMC, BKSE, BMAR, BMAY, BOCT, BOSS, BOUT, BUFF, BUL, CALF, CATH, CBSE, CSA, CSB, CSD, CSF, CSML, CSTNL, CWS, CZA, DDIV, DEEP, DES, DEUS, DFAS, DGRS, DIA, DIV, DJD, DON, DSPC, DVLU, DWAS, DWMC, EES, EFIV, EPS, EQAL, ESML, ETHO, EWMC, EWSC, EZM, FAB, FAD, FDM, FFTY, FLQM, FLQS, FNDA, FNK, FNX, FNY, FOVL, FRTY, FSMD, FTA, FTDS, FYC, FYT, FYX, GLRY, GSSC, HAIL, HIBL, HIBS, HLGE, HOMZ, HSMV, IJH, IJJ, IJK, IJR, IJS, IJT, IMCB, IMCG, IMCV, IPO, ISCB, ISCG, ISCV, ISMD, IUSS, IVDG, IVE, IVOG, IVOO, IVOV, IVV, IVW, IWC, IWM, IWN, IWO, IWP, IWR, IWS, IYY, JDIV, JHMM, JHSC, JPME, JPSE, JSMD, JSML, KAPR, KJAN, KJUL, KNG, KOMP, KSCD, LSAT, MDY, MDYG, MDYV, MGMT, MID, MIDE, NAPR, NJAN, NOBL, NUMG, NUMV, NUSC, NVQ, OMFS, ONEO, ONEQ, ONEV, ONEY, OSCV, OUSM, OVS, PAMC, PAPR, PAUG, PBP, PBSM, PEXL, PEY, PJAN, PJUN, PLTL, PRFZ, PSC, PTMC, PUTW, PWC, PY, QDIV, QMOM, QQC, QQD, QQEW, QQQ, QQQA, QQQE, QQQJ, QQQM, QQQN, QQXT, QTEC, QVAL, QVML, QVMM, QVMS, QYLD, QYLG, REGL, RFG, RFV, RNMC, RNSC, ROSC, RPG, RPV, RSP, RVRS, RWJ, RWK, RWL, RYARX, RYJ, RYT, RZG 19 Comments 16 Likes
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