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Bank of England: Risk of another fire-sale in gilts significantly reduced
Published by Jessica Weisman-Pitts
Posted on October 18, 2022
2 min readLast updated: February 3, 2026
Global Banking & Finance Review®
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Published by Jessica Weisman-Pitts
Posted on October 18, 2022
2 min readLast updated: February 3, 2026
LONDON (Reuters) – The Bank of England on Tuesday said liability-driven
LONDON (Reuters) – The Bank of England on Tuesday said liability-driven investment funds were now better prepared to manage shocks like the one triggered by September’s mini-budget, and the risk of another “fire sale” dynamic in gilts had been significantly reduced.
Pension funds were forced to offload billions of pounds of UK government bonds, or gilts, at distressed prices earlier this month, after an ill-fated package of tax cuts sent yields soaring, triggering margin calls on derivatives designed to protect the funds against movements in rates.
The Bank of England had to step in to buy bonds to stabilise the market.
“Taken as a whole, LDI funds are now significantly better prepared to manage shocks of this nature in the future,” BoE Deputy Governor Jon Cunliffe said in a letter to parliament’s Treasury Select Committee.
“As such, the risk of LDI fund behaviour triggering ‘fire sale’ dynamics in the gilt market and self-reinforcing falls in gilt prices has been significantly reduced.”
LDI funds asked for much larger levels of collateral following the market shock to protect against sharp moves in yields, with the blessing of regulators, industry sources told Reuters. Sources estimate pension schemes needed to sell at least 300 billion pounds ($339.87 billion) in assets to meet those collateral calls.
Cunliffe said the BoE would continue to monitor market conditions and will work with regulators on the lessons to be learnt from recent stresses in the financial market, pointing specifically to a global push for reform in the regulation of non-banking financial institutions, which include pension funds.
The regulatory oversight of Britain’s 1.6 trillion pound LDI sector is under scrutiny following the gilt market crisis.
Gilts have remained volatile in recent days following a government U-turn on its fiscal plans, and pension funds are continuing to adjust their hedging positions, industry sources say.
“It’s relatively calm but markets are fragile and nervous,” said Ed Wilson, a partner at pensions consultants Isio.
“It wouldn’t take much to see dramatic moves in yields again.”
($1 = 0.8827 pounds)
(Reporting by William James, Sinead Cruise, Carolyn Cohn and Tommy Wilkes, Editing by Kylie MacLellan and Bernadette Baum)
Liability-driven investment (LDI) is an investment strategy used primarily by pension funds to manage their liabilities by matching the duration and cash flows of their assets with their future obligations.
A fire sale is a situation where assets are sold at significantly reduced prices, often due to urgent financial needs or market pressures.
Pension funds are investment pools that collect and invest money to provide retirement income for employees. They are typically managed by financial institutions.
Financial stability refers to a condition where the financial system operates effectively, allowing for the smooth functioning of financial markets and institutions without major disruptions.
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