‘I’d never seen anything like it’: how market turmoil sparked a pension fund selloff
Pension fund managers breathed a cautious sigh of relief on Thursday morning. After days of market turmoil, the Bank of England’s £65m emergency intervention the day before had – at least temporarily – stabilised UK government bond prices, supported the pound, and halted a pension fund selloff that threatened to spark a deeper crisis across the City.
“After 35 years in the industry, I’d never seen anything like it,” Luke Hickmore, a fund manager at investment company abrdn said. However, markets were now “a lot calmer.” “It’s good to finally see the UK [bond] market moving at a similar pace as Europe.”
No one had predicted the chaos that followed Kwasi Kwarteng’s mini-budget last Friday. His policies were initially cast as City-friendly, with banks and insurers among the biggest beneficiaries of an allegedly pro-growth agenda, focused on sweeping tax cuts and deregulation across the financial sector.
But within hours, markets had given a far harsher verdict amid fears that the chancellor had failed to fund those reforms, creating uncertainty about the stability of the UK’s economic forecasts. Sterling exchange rates tumbled, hitting record lows by Monday, while UK government bond prices plunged.
Yet while headlines understandably focused on the immediate impact to consumers – as mortgage offers disappeared and borrowing rates started to rise – a storm was brewing in a little-known corner of the pensions market that would eventually require the central bank’s massive intervention to quell it.
The problem centred on the use of niche financial products offered by investment banks to pension funds that are trying to manage or hedge their risks. Those products – known as liability-driven investing, or LDIs – help offset
Read more on theguardian.com
