Bank of England announces measures to ease burden on UK pension funds
The Bank of England has announced measures to curb rush asset sales by pension funds in an attempt to stabilize Britain’s financial markets. The UK Treasury has also brought forward its long-awaited fiscal plan to Oct. 31 to calm the market.
Following fears of a ‘cliff edge’ where the emergency bond-buying program ends on Friday, the central bank will ease rules on the £65bn scheme and announce longer-term measures before markets open on Monday. did.
Shortly thereafter, Prime Minister Kwasi Kwarten moved forward the medium-term fiscal plan from the previously scheduled November 23 to October 31, asking the Independent Budget Responsibility Office to provide fiscal and economic forecasts on the same day. confirmed.
In a statement before markets opened on Monday, BoE said this week it would raise its purchase limit on UK government bonds and launch a new short-term funding facility to address the liquidity crisis in the UK pension industry.
Its latest intervention came at a time of turmoil in UK financial markets, following Kwarteng’s ‘mini’ budget on 23 September. In this budget, the Prime Minister announced his £45 billion in outstanding tax cuts.
These plans have ignited a historic plunge in UK government bonds, sparked a crisis in the pensions industry and threatened the BoE. Set up a bond purchase schemePension schemes are dumping a wide range of assets, including corporate bonds, as a result of the sale of gold bullion, putting a heavy strain on the market.
Kwarteng is also facing pressure to explain the financing of his tax cuts, which is the main reason why bringing forward the dates of his fiscal plan and OBR forecast will reassure the market.
The prime minister is expected to nominate a Treasury veteran as the Treasury’s new permanent secretary on Monday — not the ‘outsider’ candidate, former favorite, Justice Department permanent secretary Antonia Romeo — that he is stable. Another attempt to show the market that we care about sex.
The BoE’s intervention was successful in stabilizing the market, but tensions arose within the central bank over whether it aimed to lower gold yields and lower government borrowing costs. Bank of England officials have used quantitative easing as a monetary policy tool, but they have insisted it was not a monetary policy measure, with Deputy Governor Dave Lumsden saying last week that it was a “operation to buy time”. rice field.
The new funding facility is designed to make it clearer that these measures are monetary tools rather than a form of monetary policy.
The Bank of England said on Monday it was ready to increase its daily purchases of British government bonds to “make sure there is sufficient capacity to buy gold coins” before the program ends on Friday.Central Banks can buy up to £5 billion sow Cumulative purchases in the first eight days were less than £4 billion. This means that you have quite a bit of headroom to make additional purchases this week if needed.
Steve Webb, partner at actuarial consultancy LCP and former pensions minister, said raising the gold purchase limit “should help reduce the risk of a ‘cliff edge’ over the weekend when the current special measures are off. rice field. “.
Despite Monday’s measures, the UK government’s long-term borrowing costs continued to rise. Yields on 30-year gold coins rose 0.22 percentage points to 4.58%, the highest level since shortly after the BoE’s first intervention on 28 September.
“I don’t understand why you’re buying 10 billion a day when you’ve only bought a few hundred million before,” said RBC macro strategist Peter Schaffric. “The real question the market has is how much it actually wants to spend.”
The BoE also announced a new short-term lending facility designed to ease the burden on pension funds using debt-driven investment strategies. At the center of market turmoil.
The plunge in UK government bonds has put pressure on the pound-denominated bond market, meaning pension funds will need to quickly sell assets such as corporate bonds and property funds to make collateral payments to sustain their LDI strategies. Created a vicious circle.
In an announcement on Monday, the BoE said that by allowing a wide range of collateral, including investment grade corporate bonds, to be used under the new repo facility, it “will be able to ease the liquidity pressure banks face on their clients’ LDI funds through liquidity.” I will do it.” insurance business.”
The repo market acts as an important lubricant in the movement of billions of dollars and euros. Banks and investors use the market to find cash in the short term and offer high-quality collateral such as government bonds in return.
Peter Chatwell, Mizuho’s head of macro trading strategy, said the new facility “will reduce the need for LDI accounts to force sell to find liquidity.” crisis [among funds using LDI] It may be better addressed through this feature. ”
Additional reporting by Josephine Cumbo and Delphine Strauss
https://www.ft.com/content/c7ed9668-e316-4672-99fb-2bffa841b7e8 Bank of England announces measures to ease burden on UK pension funds