The Daily Telegraph

Regulators feared collapse of fund as bond rates soared

- By Oliver Gill

CITY regulators have identified a single fund at an asset manager which faced potential collapse in the event of a further surge in interest rates on government bonds.

A rise of just half a percentage point in gilt yields when markets opened yesterday morning would have forced the unnamed fund into a firesale of its assets, Sky News reported.

The fund in question is invested in liability-driven investment­s (LDIS), which are derivative­s meant to help insulate pension funds from the impact of inflation. But a sell-off and potential collapse was averted with the Government’s borrowing costs plunging yesterday after Jeremy Hunt, the Chancellor, undid much of his predecesso­r’s mini-budget.

The Bank of England was said to not have been concerned about wider contagion in financial markets had the fund failed. It comes after Threadneed­le Street halted a programme of bailing out pension funds on Friday.

The Bank intervened in the wake of the then chancellor Kwasi Kwarteng’s plans for a raft of unfunded tax cuts prompted a sharp fall in the price of gilts, which are linked to the cost of government borrowing.

Many pension schemes have large investment­s in gilts, meaning their falling value put pressure on LDIS and triggered so-called “margin calls”, which saw funds asked to put up more capital to backstop their investment positions.

Economists compared the crisis to the run of withdrawal­s that led to the collapse of Northern Rock in 2008.

Hedge fund chief Paul Marshall warned investors earlier this month that issues with LDIS were likely to be the first of many crises in the financial system caused by rising interest rates.

“The UK LDI industry is the first casualty of the end of the ‘money for nothing’ era – the first dead fish to float to the surface as rising central bank interest rates

‘The UK LDI industry is the first dead fish to float to the surface as rising rates act like dynamite fishing’

act like dynamite fishing in global asset markets,” Mr Marshall, co-founder of investment firm Marshall Wace, said in a letter to clients, according to Bloomberg.

In an interview with The Sunday Telegraph, Kate Jones, chairman of retirement lifeboat the PPF, warned that the crisis was far from over. She said: “I just don’t think this window is going to have been sufficient for all of the schemes to have got their houses in order. I absolutely think it’s too soon for the [Bank of England] to have withdrawn that support. The problem isn’t solved.”

The Bank of England declined to comment.

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