Material Risk.

The future coming at you.

News Items covers four subjects: (1) World in Disarray, (2) Financialization of Everything, (3) Advances in Science and Technology, and (4) Electoral politics, foreign and domestic. Six days a week, not Sundays. Weekdays by ~6:45am ET. Saturdays, sometime in the morning, usually.

1. The Bank of England yesterday took emergency action to avoid a meltdown in the UK pensions sector, unleashing a £65 billion bond-buying program to stem a crisis in government debt markets. The central bank warned of a “material risk to UK financial stability” from turmoil in the gilts market sparked by chancellor Kwasi Kwarteng’s tax cuts and borrowing plan last week. In spite of the prolonged market upheaval, City minister Andrew Griffith said the government would stick to its strategy: “We think they’re the right plans because those plans make our economy competitive,” he said. The BoE suspended a program to sell gilts — part of an effort to get surging inflation under control — and instead pledged to buy long-dated bonds at a rate of up to £5 billion a day for the next 13 weekdays. Economists warned that the injection of billions of pounds of newly minted money into the economy could fuel inflation. “This move will be inflationary at a time of already high inflation,” said Daniel Mahoney, UK economist at Handelsbanken. (Source: ft.com)

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2. Alexandra Scaggs and Louis Ashworth.

A pension meltdown forced the Bank of England to intervene in gilt markets yesterday. Executives told the Financial Times that markets barely dodged a Lehman-Brothers-like collapse – but this time with your mum’s pension at the centre of the drama. Problems with “pension plumbing” are what caused the mess. The culprit is said to be a popular pension strategy called liability-driven investing, or LDI. (Source: ft.com)

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3. Lex.

Specialist providers of LDI strategies such as Legal and General and Schroders may well have plenty of experience assessing the risk of these strategies. Indeed, rising interest rates will still be a good thing for most defined benefit pension schemes.

The problem is the speed with which rates have risen. Pension funds typically hold enough collateral to cover a 125 basis point rise in yields, thinks Simeon Willis of consultants XPS Pensions. Yields on 30-year gilts rose 95bp on Monday and Tuesday this week alone.

This is where the Buffett time bomb goes off. To top up lost collateral — margin calls — riskier liquid assets such as equities are sold first. If that pool runs dry, funds would then sell gilt holdings, fueling a feedback cycle that pushes yields higher still. Selling might then spill over into illiquid property assets, at fire sale prices.

Putting a stop to this cascade explains the Bank of England’s decision on Wednesday to intervene to buy gilts and cap yields. (Source: ft.com)

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