The Bank of England is taking three further steps to ease pressure on corporate pension funds using LDI and address market turmoil for government bonds, it said Monday in a news release.
It also pledged to work with regulators "to ensure that the LDI industry operates on a more resilient basis in future," the release said.
In late September, U.K. gilt yields surged in reaction to the government's "mini-budget" for a new growth plan, putting pressure on U.K. corporate pension funds' liability-driven investment portfolios. Widely used, total LDI assets reached nearly £1.6 trillion ($1.8 trillion) in 2021, according to the Investment Association.
The resulting drop in bond prices triggered collateral calls for many pension funds, prompting the BOE on Sept. 28 to launch a £65 billion bond-buying program "to enable LDI funds to address risks to their resilience from volatility in the long-dated gilt market. LDI funds have made substantial progress in doing so over the past week," BOE said in Monday's release.
The three additional measures aimed at supporting "an orderly end" of the bond purchase program include increasing the maximum size of the remaining five auctions from the current £5 billion per auction; launching a Temporary Expanded Collateral Repo Facility for banks to help client LDI funds with liquidity pressures; and providing additional liquidity in a permanent facility to support bank lending to LDI counterparties.
For the higher auction limits, the bank will confirm the new limit each morning, beginning with £10 billion for Monday's auction. It also said in the release that it is "ready to increase the size of its daily auctions to ensure there is sufficient capacity for gilt purchases." To date, it has carried out eight daily auctions and purchased £5 billion of bonds. The program is set to end Oct. 14.
James Lynch, fixed-income investment manager at Aegon Asset Management, cautioned that the BOE is still expected to start unwinding gilt holdings Oct. 31. "Given the tight timescales between ending the current programme on the 14th October and starting the new one on the 31st October, these two weeks will be a tricky period once again. It has also been announced this morning that the budget has been brought forward to the 31st October. Cue the Halloween analogies for the gilt market," Mr. Lynch said in an emailed statement.
