In the UK, assets are currently being sold from British pension funds to meet different margin calls. The repercussions of this selling of pension funds are starting to have an economic impact all over the world, from New York to Sydney to Frankfurt.
Repercussions Across the World
One of the countries that are currently seeing the impact of the selling of different pension assets is the US. Multiple investment-grade bonds are falling, and they currently stand at the average price of 86 cents to the dollar. This is a large reduction when you consider that in September 2021, they were 90 cents to the dollar. The Wall Street trading desk has confirmed that it is British Pension funds that have largely contributed towards the pressure to sell recently.
Not to mention, in Europe, leveraged loans have been bundled into different bonds. These are known as collateralised loan obligations, and they are also under pressure. This has resulted in an increase in the yield premium on Asian investment-grade dollar notes, which currently sits at a two-month high and is expected to continue on a similar trajectory.
Why Are UK Pension Fund Being Sold?
The selling of UK Pension Fund first began following a spike in gilt yields towards the end of September 2022. It was announced by the bank of England that there would be a planned end to emergency bond-buying programs, leading investors to hope that the central bank would back down. The assets were sold in order to meet margin calls on derivatives. These were used in order to ensure that retirees could continue getting paid even if the interest rates were to change. The system implemented which does this is called liability-driven investing (otherwise known as LDI).
The head of Citigroup, Janusz Nelson, commented on the selling, stating, “the market simply does not have the confidence, for now, that the LDI crisis will not return and has increased concerns that other pockets of leverage may cause issues.” He continued, “until we see some stability in the rates market, wherever that may come from, investors will continue to be nervous about their holdings”.
The End of Intervention
It has been confirmed that the Bank of England were hoping the bond-buying support measures would get rid of any doubt that they would intervene to quell market turmoil. The limits on buying were imposed so that if anyone tried to tap the programme, they would have major difficulties accessing it. As this occurred, traders began to feel nervous about the Bank of England ending their intervention, and as such, yields on securities that were tied to inflation (which are also known as linkers) simply moved out again. The yields on sterling-denominated bonds ballooned. They ended up increasing to more than 7%, which is the first time that this has happened since 2009.
When the governor of the Bank of England, Andrew Bailey, warned that the programme would come to an end, this only caused traders and investors to become more concerned. As such, the very next day, the Bank of England made a huge amount of emergency purchases, the biggest seen since the intervention even began.
Selling Pressure Across the World
The selling pressure and negative repercussions are not just domestic either, as they are beginning to spread to all other corners of the world. The fact of the matter is that ever since the former Finance Minister Kwasi Kwarteng put forward a package for stimulus measures in September, the British market has been in a complete tailspin.
The co-founder of hedge fund Andromeda Capital Management commented on the matter, “what is happening in the UK could lead to further volatility also in the eurozone market,” he said, “there are a lot of assets that should not be priced where they are now. We are just at the beginning.”
Change in Government
There has been a huge amount of change in the UK government since the stimulus package measures were announced as Kwasi Kwarteng was fired, and following on from that, after mounting pressure, Liz Truss was forced to resign as prime minister. This all happened during a cost of living crisis and rises in energy bills that were a threat to individuals and businesses across the country. Since then, Rishi Sunak has been appointed as the new Prime Minister and has announced Jeremy Hunt as the Chancellor of the Exchequer. This means he will be in charge of raising the country’s revenue through taxation and will also be in control of public spending as a whole. Some of his other major responsibilities include:
- The fiscal policy (this means he is in charge of presenting the annual budget)
- Monetary policy (meaning he will need to set inflation targets that the government will try to meet)
- Ministerial arrangements
- He will also be in charge of the Treasury’s response to covid-19
With this change in government only happening recently, the long-term effects are still unknown, but many hope that it will bring with it more stability.
Do You Need Financial Assistance?
With the UK economy in a bit of a tailspin, it is currently difficult for UK individuals and businesses to know what they should be doing with their money, especially if they find themselves indebted to creditors. If you need assistance throughout these unprecedented times, then you should consider enlisting the help of experts such as Simple Liquidation. At Simple Liquidation, our team of experts will be able to view your current situation and help you work out the best way forward. If you have any questions at all or would like some more information on how we are able to help, then do not hesitate to get in touch.