Simeon Willis, Chief Investment Officer at XPS Pensions Group, said: "The choppy market for gilts seen over the last few days represents the most consequential event for pension schemes' investment strategies since the onset of the coronavirus pandemic. While the Bank of England's intervention this morning will calm markets, the immediate effect has been a whiplash effect with yields falling sharply in morning trading.
"While most schemes with hedging in place will have either emerged relatively unscathed from this morning’s movements, some may have been caught out by missed collateral calls resulting in trimmed hedge positions in the last couple of days. The Bank’s intervention should hopefully lead to reduced volatility going forwards but schemes should still be proactive in looking at ways to shore up their liquidity position. Many schemes are in a position to reduce risk in light of recent funding improvements. In particular, well-hedged schemes should be focused on maintaining their hedges, while less well hedged schemes should be looking for ways to increase it whilst the favourable pricing lasts."
Susannah Streeter, Senior Investment and Markets Analyst, Hargreaves Lansdown: “The Bank of England is now pursuing a topsy turvy set of policies, unleashing a fresh bond buying spree to try and bring down punishing rates – while at the same time still signalling it will aggressively hike interest rates to try and rein in runaway inflation. This shows what a bind the bank is currently in. It knows ultra-high bond yields will cause a ricochet of problems for companies and consumers and potentially cause instability in the housing market but it’s also very worried that the tax cutting spree will could cause inflation to rise to dangerous levels.
The move that bank officials have made to step in now, just two days after it indicated it would wait until November, smacks of a bit of panic and also of frustration that the government appears to be digging in its heels, reluctant to perform a political U-turn. Instead, the Bank of England has been forced to pursue a monetary U-turn, an abrupt change of policy as the Bank’s monetary policy committee had been pursuing a policy of selling down the Bank’s bond holdings.”
Sandra Holdsworth, Head of Rates at Aegon Asset Management, said: The Bank of England stepped in today to stop the gilt market from entering a vicious spiral. Selling in the both the conventional and index linked gilt market has been intense in recent days. This has led to a huge demand for cash to support derivative structures popular amongst pension funds. Cash has been raised by selling more gilts , the prices fall and the circle continues.
As a result at a meeting of the Bank of England’s Financial Policy Committee the Bank has noted the risks to UK financial stability from dysfunction in the gilt market and has taken action by announcing temporary and targeted purchases in the gilt market to start immediately.
The Bank of England has stressed that this operation is purely as a result of market dysfunction and the potential risks to financial stability not a monetary policy decision . However the planned reduction of the balance sheet that was due to start in earlier October has been postponed to the end of the month.
|
