It’s not every day that the Bank of England is forced to step in and head off a “material risk to UK financial stability” with an emergency £65bn intervention in the bond market. But at least we got to understand what the acronym LDI stands for, said Alistair Osborne in The Times.
Little more than a week ago, to everyone beyond a few pointy-heads in the pensions industry, it would have been anyone’s guess. Large document imaging? Liquid damage indicator? Let’s do it? But then along came Trussonomics, and suddenly “liability driven investment” – and its terrifying potential impact on our pensions – became part of the lexicon.
Markets ‘barely dodged’ a collapse
By some accounts, markets “barely dodged a Lehman Brothers-like collapse – but this time with your mum’s pension at the centre of the drama”, said Alexandra Scaggs and Louis Ashworth on FT Alphaville. What on earth happened? In short, the huge sell-off of UK government bonds following the “mini-Budget” prompted a “massive move” in gilt yields (the interest rates paid on them, which move inversely to price).
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The benchmark 30-year gilt yield “spiked” by an extraordinary 1.2 percentage points in just three days. Ordinarily, you might assume that pension funds, which are big investors in long-dated bonds, would profit from this. But their LDI arrangements – insurance policies intended to smooth the returns paid to pension holders – got in the way.
Falling bond prices “had the effect of forcing pension funds to sell gilts, to honour bets they had made that prices would not fall”, said The Times. “The more prices fell, the more they had to sell, threatening to send the market into a downward spiral.” It took the BoE’s vast intervention to halt it.
Few investors ‘had this on their crisis bingo card’
“The most interesting part of any crisis isn’t the blow-up that you expected – it’s the one you didn’t see coming,” said Cris Sholto Heaton on MoneyWeek.com. “Very few investors had this on their crisis bingo card.”
Yet the risks had been flagged, said Simon Foy in The Daily Telegraph. Lord Wolfson, the boss of Next, was so worried about the looming “time bomb” that Next wrote to the Bank in 2017 to raise the alarm. Yet it seems to have remained a Threadneedle Street “blind spot”.
With calm restored in bond markets – at least until the cliff-edge of 14 October when the Bank’s bond-buying stops – there have been calls for an inquiry, said Charlie Conchie in City AM. But the industry seems unbowed. PwC’s global pensions chief claimed fears of “a wave of insolvencies” were an “overreaction”.
Meanwhile, the biggest provider of LDIs, Legal & General, insisted the chaos had had a “limited economic impact on its businesses”. Analysts at UBS, however, warned that there was still a risk of a “meltdown”.
