Source: https://www.linkedin.com/feed/update/urn%3Ali%3Ashare%3A6984877692508680192
Bloomberg LP How “Liability Driven Investment” (LDI) Blowup Crashed #UK #Gilts #Market: https://lnkd.in/gUAU9dak: #Pension #plan #plumbing problems forced the #Bank’s hand: https://lnkd.in/g5Sn67eD
#LDI #LiabilityDrivenInvestment #LiabilityDrivenInvesting
#Future #InterestRate #Derivatives #YieldCurve #Hedging Gone Upside Down:
Pension funds in aggregate have moved a lot of their assets to mirror changes in the way that their liabilities are measured as a form of hedging, but they are under-hedged.
#InterestRate #Derivatives: #Interest #Rates: #Short-#Long: #Yields #PensionPlans #MarginCall #FixedIncome #Bonds
From a week ago:
Pension plans appear to have been caught in doom-loop of margin calls on interest rate derivatives that forced them into dumping longer-maturity UK gilts, and spurred the #BankOfEngland into intervening.
In #bond-geek language, higher short-rates to restore #macroeconomic policy credibility should deliver a “bear-flattening”. Higher #bond #yields across the #curve? Sure? A much sharper rise in short-dated yields compared to long-dated yields? Absolutely.
And this is kind of what happened. Until around [that] Friday lunchtime.
Since then, #long #gilts have underperformed. It’s been carnage, frankly. It could be because #holders and #speculators have decided that the UK has properly lost the plot. There are no shortage of headlines supporting this investment case. But my suspicion is that to understand why you need to look at #plumbing issues coming from “Liability Driven Investment” (LDI) #strategies in the UK.
#PensionPlans #Risky #Investments #Long #Bonds Turning #Junk
Pension plans are BIG investors, and they have shifted massively into LDI over the past two decades. Just in the UK they represent about £1.5tn of #assets, which is about two-thirds of the UK’s GDP, or the size of the entire #gilt #market. They’re huge, in other words.
UK #defined #benefit #pension #liabilities don’t change with #bond #yields: they are a function of the number of pensioners living (present and future), perhaps their salaries, and maybe #inflation (different employers promise different inflation-related uplifts). But the estimated #presentvalue #PV of pension liabilities do change with bond yields.
So if you, a #board #member of a company with loads of #pension #obligations, want to avoid reporting wild swings in your pensions funding status to both markets (in your reports and accounts) or the Pensions Regulator (and maybe have to submit a recovery plan, as well as pay a higher risk-based PPF levy), you want a pension scheme that aligns its assets with the way your #liabilities are measured – #LDI in other words.
#LDI Latest: https://lnkd.in/g2-DgPsr
#LDI IN-DEPTH: https://lnkd.in/gJQfGhai
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