(Bloomberg) -- A small group of hedge funds snapped up gilts at rock-bottom prices hours before the Bank of England announced an extraordinary bond-purchase program two years ago to stem a fire sale, according to research from the central bank.
Hedge funds bought £3.8 billion ($4.9 billion) of UK bonds in the hours leading to the BOE’s announcement on Sept. 28 2022, which went on to trigger the greatest one-day rally in long-maturity gilts on record. The bulk of the purchases that morning were made by a limited number of hedge funds, the researchers said.
Former Prime Minister Liz Truss’s unfunded tax cuts had triggered the selloff, which was then exacerbated by a leveraged pension fund strategy known as liability-driven investment (LDI) funds. Facing emergency collateral calls from counterparties, that created a vicious circle of forced selling that only stopped when the BOE intervened.
Some 44% of purchases by hedge funds during the two-week period that followed the fiscal announcement were made “in the small window” just before the BOE’s intervention, the paper said.
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The funds may have received market intelligence from their dealer networks “allowing them to time their purchases when prices troughed,” the researchers said. The timing of the trades does not imply these funds held private information about the BOE’s plans, they added.
After climbing around a percentage point over the course of two sessions, the 30-year gilt yield dropped a record 106 basis points following the BOE’s intervention on Sept. 28 2022.
“Hedge funds who purchased gilts on the morning of the 28th would have earned about a 40% unlevered return if they then sold them at the end of the trading day,” the paper said.
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