Sale of UK pension funds sparks fear in bond markets

(Bloomberg) – UK pension funds are shedding assets to meet margin calls as the BOE confirmed it would end emergency bond purchases, and the repercussions are being felt everywhere from Sydney to Frankfurt and New York.

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In the United States, investment-grade corporate bonds are down, with prices averaging around 86 cents on the dollar from 90 cents on September 21. British pension funds have contributed to the selling pressure in recent days, according to a Wall Street trader. desk.

In Europe, leveraged loans bundled into bonds known as secured loan bonds have come under pressure. In Australia, investors were invited to bid on mortgage-backed securities that were being auctioned. The yield premium on investment-grade Asian dollar notes is at its highest level in two months and is heading for a third day of increases.

UK pensions are selling to meet margin calls on derivatives they used to ensure they could keep paying pensioners even if interest rates changed, using a technique called leveraged investing passive. The unloading that began after a surge in gilt yields two weeks ago was renewed this week, when the Bank of England confirmed that it planned to end a program of buying bonds on Friday. emergency. Investors are hoping the central bank will back down.

“The market just doesn’t have confidence, for now, that the LDI crisis won’t return and is increasingly concerned that other pockets of leverage could cause problems,” said Janusz Nelson, head of Western European Investment Grade Corporate Syndicate at Citigroup Inc.. said. “Until we see some stability in the rates market, wherever it comes from, investors will continue to be nervous about their holdings.”

End of intervention

The Bank of England had hoped its bond-buying support measures would create such a large bazooka that no one would doubt it would step in to quell the market turmoil, according to a person with knowledge of the matter. Purchase limits have been increased to allay any concerns that anyone looking to exploit the program this week will have difficulty accessing it, the person said, asking not to be identified as the matter is private.

Then, traders worried about the end of the BOE’s intervention. Yields on inflation-linked UK government securities, known as linkers, fell again. Yields on sterling-denominated investment grade corporate bonds soared above 7% for the first time since 2009. Their fears intensified on Tuesday when BOE Governor Andrew Bailey warned the program would end Friday. The following day, the central bank made its largest round of emergency purchases since the intervention began last month.

But the selling pressure in recent sessions has also spread to other parts of the world. UK markets have been in free fall since Chancellor of the Exchequer Kwasi Kwarteng presented an unfunded fiscal stimulus package on September 23.

“Investors fear further selling from UK liability-focused investment managers in response to margin calls, including selling high-quality USD credit,” JPMorgan Chase strategist Eric Beinstein wrote on Wednesday. & Co. “There was evidence of this sale yesterday.”

This selling has manifested itself in movements in the risk premium. On Tuesday, US investment grade bond spreads widened by five basis points, according to Bloomberg index data. But the Markit CDX North American Investment Grade Index, an indicator of credit risk, rose just 1.9 basis points. A similar underperformance in cash bonds occurred two weeks ago when the UK pensions problem first erupted, JPMorgan’s Beinstein wrote.

Meanwhile, the sale by UK liability-focused funds “continues to result in a much higher than usual amount” of Australian securitization notes being offered, National Australia Bank analysts including Ken Hanton wrote. , in a Thursday report.

key date

If the BOE stays the course and ends the buying program on Friday, the next critical date could be October 31. That’s when Kwarteng will announce its medium-term fiscal strategy and the nonpartisan Office for Budget Accountability will release an accompanying assessment. The date was brought forward by more than three weeks after City of London figures warned Kwarteng he could not wait until late November to reassure markets.

The BOE plans to begin actively reversing its quantitative easing program the same day by selling government securities, which could add to frayed nerves.

The end of forward guidance from central banks has upended market strategies based on buying the dip and selling the volatility assuming correlations would remain stable as they have been for two decades, said Alberto 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 happens in the UK could also lead to increased volatility in the eurozone market,” said Gallo, who previously ran funds for Algebris Investments. “There are a lot of assets that shouldn’t be valued where they are right now. We’re only just starting. »

Elsewhere in the credit markets:

Europe

Activity in the region’s primary bond market slowed markedly on Thursday, with only one deal driven by price ahead of the US CPI crunch data later in the day. Landesbank Berlin AG’s covered bond deal will take this week’s volume above 26 billion euros.

  • Spanish utility Naturgy SA has announced the early redemption of one of its hybrid bonds, triggering the biggest ticket price hike since 2016

  • Shares in Italian lender Monte Paschi slumped after setting the terms of its rights offering at a price below the theoretical price excluding rights

Asia

Asian issuers in the dollar bond market remained on the sidelines on Thursday as yield premia widened ahead of US inflation.

  • Yield premiums on high-quality Asian-dollar notes outside Japan are on track to hit their highest level since July, according to a Bloomberg index

  • Hawkish monetary policy is making issuing bonds more expensive than lending, according to data analyzed by Bloomberg. Three-year yields from well-rated companies rose above the one-year marginal cost of lending rate – the indicative rate at which banks lend to businesses – earlier this week

Americas

EnQuest Plc sold the second US junk bond in as many days, a rare feat in a primary market hampered by rising interest rates and broader volatility. The London-based oil producer sold a $305 million 5-year note, which was raised by $5 million before pricing, offering a high yield of 12%.

  • Three blue-chip companies that had sought to sell bonds on Wednesday pulled out as inflation data beat estimates. The region hasn’t seen a high-level business deal in a week

  • Broader primary market volumes remain thin, but some deals are closing despite hawkish central bank rhetoric and credit issues hitting the bottom of the market

  • Mitsubishi UFJ Financial Group Inc. plans to accelerate lending to global funds and other institutional investors in the United States as it prepares to overtake Goldman Sachs Group Inc. this year in syndicated loans in the most world’s largest economy

(Updates with October 31 financial plan details in 12th paragraph.)

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