(Bloomberg) — UK pension funds are selling assets to meet margin calls as the BOE confirmed it will end emergency bond buying, and the reverberations are being felt everywhere from Sydney to Frankfurt and New York.
In the US, investment-grade corporate bonds are falling, averaging about 86 cents on the dollar, down from 90 cents on September 21st. British pension funds have added to the selling pressure in recent days, according to a Wall Street IPO, according to Desk.
In Europe, leveraged loans bundled in bonds, so-called collateralized loan obligations, have come under pressure. In Australia, investors were reportedly asked to bid on mortgage-backed securities that were being auctioned. The spread on Asian investment-grade dollar bills is at a two-month high and heading for a third day of rise.
Selling UK pensions to meet margin calls on derivatives they have used to ensure they can keep paying pensioners even if interest rates change, using a technique called ‘liability driven investing’. The swap, which began after a rise in gilt yields two weeks ago, was renewed this week when the Bank of England confirmed it plans to end an emergency bond-buying program on Friday. Investors hope the central bank will back down.
“For now, the market simply lacks confidence that the LDI crisis will not return and has growing concerns that other leverage niches could cause problems,” Janusz Nelson, head of Western European Investment Grade Corporate Syndicate at Citigroup Inc. said. “Until we see some stability in the rates market, wherever that is coming from, investors will continue to be nervous about their holdings.”
end of the intervention
The Bank of England had hoped their bond-buying support measures would create such a big bazooka that no one would doubt they would step in to quell the market turmoil, according to a person familiar with the matter. Restrictions on the purchase have been increased to address any concerns that anyone who wants to access the program this week would have difficulty accessing it, the person said, asking not to be identified as the matter is private.
Then traders became concerned about the end of the BOE intervention. Yields on inflation-linked UK government bonds, so-called linkers, moved lower again. Sterling investment grade corporate bond yields rose above 7% for the first time since 2009. Their fears grew on Tuesday as BOE Gov. Andrew Bailey warned the program would end on Friday. The next day, the BOE conducted its largest round of distressed buying since intervention began last month.
But the selling pressure of recent sessions has spread to other parts of the world as well. UK markets have been in a tailspin since Chancellor of the Exchequer Kwasi Kwarteng unveiled a package of unfunded fiscal stimulus on September 23.
“Investors fear more selling by liability-oriented UK investment managers in response to margin calls, including the sale of USD-rated bonds,” wrote Eric Beinstein, strategist at JPMorgan Chase & Co., on Wednesday. “There was some evidence of this sale yesterday.”
Read: UK Bonds Make Dramatic Comeback as BOE Raises £4.6B
This selling was reflected in movements in risk premiums. US investment-grade bond spreads widened five basis points on Tuesday, according to Bloomberg index data. But the Markit CDX North American Investment Grade Index, an indicator of credit risk, widened just 1.9 basis points. A similar underperformance of cash bonds happened two weeks ago when the UK pension problem first flared up, wrote JPMorgan’s Beinstein.
The end of central bank forward guidance has muddled market strategies based on buying the dip and selling the volatility on the assumption that correlations would remain as stable as they have been for two decades, Alberto said 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’s happening in the UK could also create further volatility in the euro-zone market,” said Gallo, who used to manage money for Algebris Investments. “There are many assets that should not be valued where they are now. We are just at the beginning.”
(Updates with Asian credit market levels in third paragraph.)
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