UK pension funds dump assets

UK pension funds are selling assets to meet margin calls as the Bank of England confirmed it will end emergency bond purchases. Markets from Sydney to Frankfurt and New York have been affected.

U.S. investment-grade corporate bonds are falling, averaging around 86% of par, compared with 90% on Sept. 21. Traders on Wall Street said U.K. pension funds added to the selling pressure.

European mortgage-backed bonds have been under pressure. In Australia, investors are reportedly being asked to bid on mortgage-backed securities that are being auctioned. Yield premiums on Asian investment-grade U.S. dollar bonds are now at two-month highs and are set to rise for the third day in a row.

It is understood that after the British government proposed an unfunded fiscal stimulus plan at the end of September, which triggered a sell-off of British government bonds, British pension funds suffered a vicious circle. As government bond prices plummeted, the funds had to put up additional collateral in derivatives trades, and to raise cash, they sold bonds, which sent bond prices further down, forcing them to put up more collateral. To avoid a collapse in the UK bond market, the Bank of England initially committed on September 28 to carry out an emergency intervention of 65 billion pounds (1.1140, 0.0041, 0.37%).

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