Money managers have moved to reassure their U.K. pension fund clients over the liquidity of their portfolios and leverage related to liability-driven investment strategies.
Statements by Legal & General Investment Management and BlackRock, issued over recent days, followed unprecedented volatility in U.K. government bond markets as a result of market jitters related to the government's mini-budget, released on Sept. 23.
Promises including tax cuts, announced by Chancellor of the Exchequer Kwasi Kwarteng, sent gilt yields soaring and prices plummeting. Pension funds using derivatives as part of LDI portfolios were required to post additional collateral against their positions, with some funds needing to sell out of assets to meet their liquidity needs.
Gilt yields jumped to over 4% from below 2% weeks earlier. On Sept. 28, the Bank of England stepped into gilt markets with a commitment to buy up to £65 billion ($72.5 billion) in long-dated government bonds. In an effort to combat spiraling inflation, the BOE had already hiked interest rates to 2.25% in September in several stages. Rates were at 0.1% until the bank's December meeting, when they were first raised to 0.25%.
LGIM, in parent company Legal & General's half-year update, said increases and the speed of those hikes "have caused challenges for the pension fund clients and counterparties of LGIM's U.K. LDI business."
The BOE's intervention has contributed to helping "to alleviate the pressure on our clients. We are continuing to work closely with them to achieve appropriate hedging levels in their portfolios."
The £1.3 trillion ($1.45 trillion) money management firm added that, as an agent between LDI clients and market counterparties, it "therefore has no balance sheet exposure."
Also moving to reassure clients was $8.49 trillion manager BlackRock.
"We have been reducing leverage in some of our LDI funds, acting prudently to preserve our clients' capital in extraordinary market conditions," a spokesman said in an email. "Trading in BlackRock funds has not been halted, nor has BlackRock ceased trading in gilts."
Jos Vermeulen, head of solution design at Insight Investment, said in an email: "Given recent market events we are working with some U.K. pension fund clients to reduce leverage in their LDI strategies. This aims to ensure that their liability hedges remain resilient."
A spokesman for Schroders was not immediately available to comment. A spokesman for LDI manager Columbia Threadneedle Investments, which now owns the legacy BMO EMEA business, did not immediately respond to a request for comment.
Following its commitment to purchase up to £65 billion in long-dated gilts — at a rate of up to £5 billion per day until Oct. 14 — the BOE on Monday said in a market notice that it is "studying patterns of demand and will continue to use reserve pricing in order to ensure the backstop objective" of its asset purchases is delivered. "In addition, the bank stands ready to adjust any of the other parameters of the auction in order to secure that objective," the notice said.
Also, the BOE reiterated that, starting Tuesday, it was asking "gilt-edged market makers" — its counterparties in gilt markets — to identify whether offers in gilt auctions are being made on behalf of themselves, clients or another dealer. The bank had already outlined the requirement in a market notice dated Sept. 1, in relation to planned quantitative tightening.
"The bank is collecting this information to get a better understanding of the effect of its operations on the broader market and the financial stability objective of these purchases," the BOE said in its notice.
