It is far from clear how much time the Bank of England has bought as shockwaves reverberate through global markets from Liz Truss’ plan
Calls to the Bank of England saying some British pension funds were struggling to meet margin calls began on Monday. By Wednesday they were getting more urgent and coordinated.
But while these reactions were plain for all to see, behind the financial market screens there was a hidden impact. Pension schemes were forced to sell government bonds known as gilts after they found it hard to meet emergency demands from the LDI funds for collateral on ‘under-water’ derivatives positions, where the value is less than on a fund’s books.
And echoing former European Central Bank boss Mario Draghi at the height of the euro zone debt crisis, the central bank pledged to do whatever it took to bring financial stability. “By the end of the day we were saying if this continues we are in serious trouble,” one fund manager at a large British corporate pension scheme told Reuters.
The potential for the stress to cascade beyond pension funds and throughout Britain’s financial industry was real. If the LDI funds defaulted on their positions, banks which had arranged the derivatives would be sucked in too. Britain’s central bank is now in the unenviable position of having postponed its plan to sell bonds, resulting in monetary loosening, and at the same time tightening with interest rates.
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