An unprecedented rise in yields on long-dated government bonds is inflicting “huge and sudden cash calls” on pension funds that could damage the gilts market, a newspaper report today say.
An article in The Times this morning (28 September) reported that schemes are suddenly being hit with "repeated calls for cash as collateral" from their liability-driven investment (LDI) fund managers - noting that Legal & General had issued some of its clients with an emergency call for cash on Sunday night, to be received by yesterday.
It said the cash calls since Friday's mini budget have been running at "billions of pounds a day" - forcing some schemes to sell gilts, a move it said is further pushing down prices and risks triggering fresh collateral calls and a fresh round of selling.
According to data from Refinitiv IFR Markets, yields on benchmark 10-year gilts rose from 0.974% at the beginning of this year to 2.803% at the end of August. This month they had risen to 3.139% at the end of 16 September and 3.495 at the end of 22 September, the day before the chancellor's Mini Budget.
By the close of last Friday, yields had spiked to 3.827 and on Monday rose significantly further to 4.282%. Yesterday, yields climbed further still to close at 4.514%.
Yields on long-dated gilts have seen an even more substantial rise - with the yield on 25 year paper increasing from 3.841% at the end of last Thursday to 4.637% at the end of Monday. By the close of yesterday, 25-year yields stood at 5.023% and 30-year yields stood at 4.991% - compared to 1.199% and 1.119% at the start of the year.
Earlier this week, Professional Pensions reported that consultants were beginning to see some challenges for schemes with LDI portfolios.
On Monday, XPS Pensions chief investment officer Simeon Willis warned that liability-driven investment (LDI) managers were beginning to flag new emergency collateral calls - a trend he said was likely to continue.
He urged schemes to review their plans as a matter of urgency.
Willis said: "Agility is key, and schemes should be braced as we move to a new market environment. Without fail, schemes using LDI should review their plans and assess whether further action is required to maintain a diverse portfolio, be ready for any further LDI collateral calls and maintain - or even increase - hedging to lock in these improvements."
On Friday, Barnett Waddingham partner Ian Mills said similar. He said: "DB schemes using LDI will come under pressure, especially if the rise in yields is sustained. The rise in gilt yields will likely cause schemes to have to recapitalise hedges - some will be able to do so from cash reserves - but others will find they are forced to sell other assets. Some schemes could even be forced to unwind hedges exposing them to the risk of reversals in yields.
"Schemes using LDI should immediately review whether their collateral buffers remain adequate, and consider taking remedial action if not. Waiting to receive a collateral call that you cannot meet is not a good idea."