British watchdogs hold crisis talks to avert gilt crash

The UK watchdogs responsible for the £1.5 trillion corner of the fixed income sector that almost imploded this week are in daily talks with wealth managers to stave off a new crisis if the Bank of England’s bond purchases end.

The £65bn plan, which ends October 14, was launched on Wednesday to protect the pension sector after this week’s market turmoil sparked by Chancellor Kwasi Kwarteng’s plans for unfunded tax cuts.

Regulators have called emergency meetings as part of their regulatory response framework triggered by threats to financial stability, people familiar with the matter said.

They fear a bond sell-off will resume if the BoE withdraws support, leading to a rise in yields and more pressure on defined benefit pension funds, which dumped gilts seeking emergency collateral.

Despite the BoE’s intervention, defined benefit plans still have to sell other assets to raise cash to meet margin calls. In a rush to raise cash, pension funds have dumped stocks and bonds, and some are seeking bailouts from their corporate backers.

Daniela Russell, head of UK rates strategy at HSBC, said the BoE asset purchases are a “sticker” buying time for pension schemes. “With a possible cliff if this is to end. . . The bank might consider offering more support,” she said.

“The BoE bought time to mitigate the shock,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.

“But if nothing changes on the fiscal policy side, the BoE will have to stay in the market longer. The market needs to see how it will achieve a debt to GDP ratio decline in the medium term. Either the policies have to be removed from the budget or they will require massive spending cuts.”

One option could be for the BoE to convert its government bond purchases into a permanent facility that could be triggered in similar circumstances without the need for emergency intervention or taxpayers’ money backing, a former policymaker said.

The events of the past week have rocked pension systems and also the UK housing market as many lenders have pulled out of contracts and homeowners are unsure whether their mortgages will be affordable.

The sharp fall in 30-year Treasury bond prices, triggered by last week’s tax cut announcements, led to unprecedented margin calls — demands that they raise more money — for defined benefit schemes.

The Financial Conduct Authority, the Pensions Commission and the Treasury declined to comment. The BoE said in a statement that the “scale and speed” of bond market turmoil this week far exceeded historical moves“.

The 30-year gilt yield fluctuated 1.27 percentage points on Wednesday, more than the annual range in all but four of the last 27 years, she added.

Additional reporting by Adrienne Klasa, Daniel Thomas and Sylvia Pfeifer British watchdogs hold crisis talks to avert gilt crash

Adam Bradshaw

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