Lessons from the UK pension fund shock
What a wild week. The turmoil in UK markets escalated far beyond what anyone could have expected even after the government revealed a remarkably ill-judged mini-Budget last Friday.
Stepping back to behold the detritus, some things are becoming a little clearer. Some of the scale of the recent UK government bond market collapse is explained by a “doom-loop” triggered by pension fund gilt selling. This escalated calls on funds to post collateral on derivative trades struck, ironically, to hedge their liabilities. In turn, this triggered more selling. However, the answers to many questions remain murky.
For example, just how did so many pension plans mess up their risk management so badly, how close to the brink did they actually come, and where do we go from here? Is the current uneasy calm bought by the Bank of England’s intervention durable without the UK government shifting its fiscal stance — or at least appearing willing to listen to the market’s screams?
This story originally appeared on: Financial Times - Author:Robin Wigglesworth
