The Bank of England told lawmakers that a number of pension funds were hours from collapse when it decided to intervene in the U.K. long-dated bond market last week.
The central bank’s Financial Policy Committee stepped in after a massive sell-off of U.K. government bonds — known as “gilts” — following the new government’s fiscal policy announcements on Sept. 23.
The emergency measures included a two-week purchase program for long-dated bonds and the delay of the bank’s planned gilt sales, part of its unwinding of Covid pandemic-era stimulus.
The plunge in bond values caused panic in particular for Britain’s £1.5 trillion ($1.69 trillion) in so-called liability-driven investment funds (LDIs). Long-dated gilts account for around two-thirds of LDI holdings.
The 30-year gilt yield fell more than 100 basis points after the bank announced its emergency package on Wednesday Sept. 28, offering markets a much-needed reprieve.
Cunliffe noted that the scale of the moves in gilt yields during this period was “unprecedented,” with two daily increases of more than 35 basis points in 30-year yields.
“Measured over a four day period, the increase in 30 year gilt yields was more than twice as large as the largest move since 2000, which occurred during the ‘dash for cash’ in 2020,” he said.
Author(s): Elliot Smith
Publication Date: 6 Oct 2022
Publication Site: CNBC