March 24, 2023

“Forced Selling of Everything” – UK Pension Funds Continue to be Liquidating Assets, Seeking Bailouts

The timing could not be worse.

UK pension funds are/have been servicing increasing margin calls driven by extreme moves in actual and nominal rates.

Because BondVigilantes. com notes , they are on a hunt for liquidity (cash) to service these types of calls at the same time the liquidity (bid offer spread) associated with asset markets is extremely sensitive. A sub layer to this dynamic is that  pension funds are also a substantial provider of gilts towards the repo market   (which they repo to be able to fund levered investments) and where we are now seeing some strain as these gilts are either withdrawn from repo programmes (to sell, as of yesterday to the BOE) or repo’d out to raise cash to fund said perimeter calls.

The timing could not end up being worse   along with quarter end looming, maximizing demand for bank stability sheet from non-bank market participants and an increasing war chest of money from the liquidity ‘ Haves’ chasing collateral.

While The Bank of England stepped in to buy gilts on Wednesday, stabilising the marketplace,   The Economic Times reports   that the  pension check funds are continuing to sell assets to meet cash calls.

“ There’s a lot of pain out there, a lot of forced promoting, ” said Ariel Bezalel, fund manager at Jupiter.

“ People who are obtaining margin called are having to market what they can rather than the actual would like to. ”

This individual said the BoE’s intervention had helped to bring lower yields in longer-dated bonds but other assets continued to be “ under pressure” due to the fact pension schemes were “ having to liquidate paper”. He or she added:

“ We’re viewing really quality investment grade paper coming up for grabs… names like Heathrow, Sara Lewis, Gatwick, BT – solid fundamentals – to boost cash. ”

Simeon Willis, partner at XPS Pensions Group, said:

“ Pension schemes are selling equities and corporate bonds and using those assets to best up their hedges. ”

“ There could be many countless schemes that have had their own hedges reduced or eliminated. This means their funding positions are now much more vulnerable compared to they were a week ago. ”

To finance the collateral calls, a few pension schemes have resorted to asking employers support their plans for cash.   Outsourcing team Serco provided £ 60mn after a request from pension trustees, according to a person acquainted with the matter, a highly unusual move for a well-funded corporate scheme. Sky News first reported the move.

While some schemes continue to rush to raise cash to fund their own derivatives positions,   others have had the positions terminated by LDI supervisors, including BlackRock,   leaving them exposed to more moves in rates plus inflation.

Associated with this liquidation, more behind-the scenes details of this week’s chaos in the UK are being exposed with  The FT reporting that none additional virtue-signaler-extraordinaire  BlackRock basically ‘ blackmailed’ the UK federal government   into intervention as UNITED KINGDOM pension funds faced crises .

BlackRock, which sits between the pension check schemes and banks on derivatives trades designed to hedge against adverse movement in interest rates and inflation, told its clients that it  would no longer demand additional collateral but would instead liquidate holdings to fulfill margin calls  which were soaring due to the extreme volatility in UK asset prices.

In a memo sent on Wednesday early morning, BlackRock told clients having a liability-driven investing strategies that it would freeze “ money more at risk of assets being exhausted” and move the particular assets to cash.

The graph below shows the  overall market value of available gilt collateral has fallen dramatically over recent days

BlackRock will be “ not proceeding along with any further recapitalization events until further notice”, said the e-mail to LDI clients, which usually was  seen from the Financial Times   and was   sent at about 11am, prior to the Bank of England introduced its emergency intervention in order to stabilise the gilt marketplace.

Jesse Fogarty, a professional trustee along with Dalriada, a trustee company, said:

“ If you run out of collateral these were saying, ‘ we will shut the position’, without returning to ask for more money from the account. It is protecting their placements against contagion but it is not really protecting their pension funds. ”

This liquidation would have caused even further vicious spiral plunges in gilt prices and,   just as JPMorgan did within 2019 with The Fed plus ‘ Not QE’ to bailout the repo market , BlackRock exercised the ‘ TBTF Put’ plus forced The Bank of England’s hand to re-liquify the long-end of the gilts marketplace.

In summary,   as BondVigilantes. com notes , there are clear collateral strains for some sterling market participants and demarcation of the liquidity ‘ Possess and Have Nots’. The immediate question (with an unclear answer at the moment in my view) is  whether this could spill over into a wider liquidity breakdown as the different actors seek to right-size or further shore up their defensive cash stocks and shares during these unprecedented markets.   One thing that goes without saying is that cash really is king at the moment.

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