Pension funds are being asked to put up more cash to cover hedging positions amid a sell-off in bonds – in an uncomfortable echo of the meltdown under Liz Truss.
The cash calls come as UK bonds, known as gilts, take a pounding amid the market mayhem caused by the war in Iran.
Yields on ten-year gilts, which rise as their price falls, spiked to more than 5.1 per cent at the start of this week.
They eased after US President Donald Trump’s claim the US was in peace talks was Iran.
But with the conflict continuing to choke off energy supplies from the Middle East, the sell-off has since resumed and gilt yields yesterday soared back above 5.1 per cent.
The sell-off causes problems for pension funds which invest in gilts and may use them as collateral for financial instruments employed as part of ‘liability driven investment’ (LDI) strategies.
Meltdown: Pension funds are being asked to put up more cash to cover hedging positions amid a sell-off in bonds
When bonds sell off, the value of that collateral falls. That can mean the funds are asked to post cash to make up the shortfall.
Pensions consultancy XPS said a small number of its clients needed to meet cash calls on LDI positions this month, but that the market was operating normally.
Rival consultancy Mercer said it had knowledge of a fund that met a cash call this month, but that its own clients were unaffected.
James Lewis, UK chief investment officer at Mercer, said: ‘If yields do keep going up, I suspect we will see multiple managers making capital calls. But I would expect that to be dealt with in an orderly fashion.’
At the time of the 2022 crisis after former prime minister Truss’s disastrous mini-Budget, bonds sold off so quickly that the market was flooded with cash calls.
Funds had to sell up to raise the cash, prompting their values to fall even further. The meltdown forced the Bank of England to step in and ultimately costed Truss her job.
Britain’s latest bond sell-off has not been as rapid, but yields are higher now than they were back then and the rise in them this month is on course to be the steepest in four years.
The impact has also been unlike 2022 due to reforms that have made LDI less exposed to market swings.
Yet it will be politically embarrassing for Rachel Reeves’s handling of the economy to be compared to that of Truss and her Chancellor Kwasi Kwarteng.
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