Oct 14, 2022
L&G Brings Forward Pension Cash Requests to Avoid BOE Cliffedge
, Bloomberg News
(Bloomberg) -- Legal & General Group Plc is asking pension clients to increase cash collateral buffers early to cope with potential “further market stress” ahead of the end of Bank of England’s emergency bond-buying program Friday.
The rescheduling means the pricing point of the dealing day will be Friday, “which means required trading can be completed before the BOE support ends,” according to L&G emails sent to clients earlier this week seen by Bloomberg. The UK asset manager is looking to use the re-balancing to increase collateral levels so they can withstand a further half a percentage point rise in yields, the emails said.
The precautionary move speaks to the continued need for pooled LDI funds to increase their cash buffers, which were depleted after a rapid surge in UK borrowing rates that forced widespread liquidation of assets earlier this week. It also outlines fears among the pension industry that turbulence in the market may resume next week as BOE buying ends. An L&G spokesperson declined to comment.
“There is a lot of nervousness about what’s going to happen with the BOE steps away,” said Andrew Overend, a partner at First Actuarial. “The concern is that we are not in normal markets and if yields just absolutely accelerated from where we are now -- it wouldn’t matter how cautious they’ve been. They’re still going to run out of cash.”
UK government bonds rose in recent sessions on expectations for government u-turns on tax cuts, as well as increased buying from the BOE. The yield on 30-year government bonds has fallen around half a percentage point since a peak above 5% on Wednesday. That said, selling resumed late in the Friday session as the end to BOE buying neared and as markets weighed UK Prime Minister Liz Truss firing Chancellor of the Exchequer Kwasi Kwarteng.
Many remain wary of what will happen once the emergency support ends.
“Should the BOE step away from the market today as suggested, we could see gilt yields rising, and the feedback loop of selling of gilts, as pensions schemes struggle to maintain hedges, re-assert itself,” said Chris Arcari, head of capital markets at consultancy Hymans Robertson. “ To some extent gilt yields, real and nominal, have repriced to reflect recent fundamental developments, but they have also face intense technical headwinds.”
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