UK pension funds selling stokes fear across global bond markets

LONDON - British pension funds are dumping assets to meet margin calls, and the reverberations are being felt everywhere from Sydney to Frankfurt to New York.

In the United States, investment-grade corporate bonds are falling, with average prices of around 86 cents on the dollar compared with 90 cents on Sept 21. British pension funds have contributed to the selling pressure in recent days, according to one Wall Street trading desk.

In Europe, leveraged loans bundled into bonds known as collateralised loan obligations have been under pressure. The yield premium on Asian investment-grade dollar notes is at a two-month high and headed for a third day of increase.

British pensions are selling to meet margin calls on derivatives they used to help ensure they could keep paying retirees even if interest rates changed, using a technique called liability-driven investing (LDI).

The offloading that first began after a spike in gilt yields two weeks ago was renewed this week, when the Bank of England (BOE) confirmed that it planned to end an emergency bond-buying programme on Friday. Investors are hoping that the central bank will back down.

"The market simply does not have the confidence, for now, that the LDI crisis will not return and has increased concerns that other pockets of leverage may cause issues," said Mr Janusz Nelson, head of western European investment-grade corporate syndicate at Citigroup.

"Until we see some stability in the rates market, wherever that may come from, investors will continue to be nervous around their holdings," he added.

The BOE had hoped its bond-buying support measures would create a bazooka so big that nobody would be in any doubt that it would intervene to quell market turmoil, according to a person with knowledge of the matter.

Limits on the buying were increased to allay any concerns that anyone seeking to tap the programme this week would have difficulties accessing it, the person said.

Then traders grew concerned about the end of BOE intervention. Yields on British government securities tied to inflation, known as linkers, moved out again. Yields on sterling-denominated investment-grade corporate bonds ballooned to over 7 per cent for the first time since 2009.

Their fears intensified on Tuesday when BOE governor Andrew Bailey warned that the programme would end on Friday. The next day, the BOE made its biggest round of emergency purchases since the intervention began last month.

But the selling pressure in recent sessions has been spreading to other parts of the world as well. British markets have been in a tailspin since Finance Minister Kwasi Kwarteng presented a package of unfunded government stimulus measures on Sept 23.

"What is happening in the UK could lead to further volatility also in the euro zone market," said Mr Alberto Gallo, co-founder of hedge fund Andromeda Capital Management. "There are a lot of assets that should not be priced where they are now. We are just at the beginning." BLOOMBERG