Lending markets

Sale of UK pension funds sparks fear in global bond markets

(Bloomberg) – UK pension funds are shedding assets to meet margin calls as the BOE confirmed it would end emergency bond purchases, and the repercussions are being felt everywhere from Sydney to Frankfurt and New York.

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In the United States, investment-grade corporate bonds are down, with prices averaging around 86 cents on the dollar from 90 cents on September 21. British pension funds have contributed to the selling pressure in recent days, according to a Wall Street trader. desk.

In Europe, leveraged loans bundled into bonds known as secured loan bonds have come under pressure. In Australia, investors were reportedly invited to bid on mortgage-backed securities that were being auctioned. The yield premium on investment-grade Asian dollar notes is at its highest level in two months and is heading for a third day of increases.

UK pensions are selling to meet margin calls on derivatives they used to ensure they could keep paying pensioners even if interest rates changed, using a technique called leveraged investing passive. The unloading that began after a surge in gilt yields two weeks ago was renewed this week, when the Bank of England confirmed that it planned to end a program of buying bonds on Friday. emergency. Investors are hoping the central bank will back down.

“The market just doesn’t have confidence, for now, that the LDI crisis won’t return and is increasingly concerned that other pockets of leverage could cause problems,” said Janusz Nelson, head of Western European Investment Grade Corporate Syndicate at Citigroup Inc.. said. “Until we see some stability in the rates market, wherever it comes from, investors will continue to be nervous about their holdings.”

End of intervention

The Bank of England had hoped its bond-buying support measures would create such a large bazooka that no one would doubt it would step in to quell the market turmoil, according to a person with knowledge of the matter. Purchase limits have been increased to allay any concerns that anyone looking to exploit the program this week will have difficulty accessing it, the person said, asking not to be identified as the matter is private.

Then, traders worried about the end of the BOE’s intervention. Yields on inflation-linked UK government securities, known as linkers, fell again. Yields on sterling-denominated investment grade corporate bonds soared above 7% for the first time since 2009. Their fears intensified on Tuesday when BOE Governor Andrew Bailey warned the program would end Friday. The following day, the BOE carried out its biggest round of emergency purchases since the start of the intervention last month.

But the selling pressure in recent sessions has also spread to other parts of the world. UK markets have been in free fall since Chancellor of the Exchequer Kwasi Kwarteng presented an unfunded fiscal stimulus package on September 23.

“Investors fear further selling from UK liability-focused investment managers in response to margin calls, including selling high-quality USD credit,” JPMorgan Chase strategist Eric Beinstein wrote on Wednesday. & Co. “There was evidence of this sale yesterday.”

Read: UK bonds make dramatic comeback as BOE gains £4.6bn

This selling has manifested itself in movements in the risk premium. On Tuesday, US investment grade bond spreads widened by five basis points, according to Bloomberg index data. But the Markit CDX North American Investment Grade Index, an indicator of credit risk, rose just 1.9 basis points. A similar underperformance in cash bonds occurred two weeks ago when the UK pensions problem first erupted, JPMorgan’s Beinstein wrote.

The end of forward guidance from central banks has upended market strategies based on buying the dip and selling the volatility assuming correlations would remain stable as they have been for two decades, said Alberto Gallo, co -founder of hedge fund Andromeda Capital. Management. Risk parity strategies and 60-40 portfolios are among those that could be vulnerable, he said.

“What happens in the UK could also lead to increased volatility in the eurozone market,” said Gallo, who previously ran funds for Algebris Investments. “There are a lot of assets that shouldn’t be valued where they are right now. We’re only just starting. »

(Updates with Asian credit market levels in third paragraph.)

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