A conversation with Toby Nangle on the financial crisis in the UK

In a matter of days in late September the UK faced a perfect storm including the Bank of England announcing higher policy rates and outright bond sales, along with a new Prime Minister and Chancellor announcing aggressive fiscal measures. Sharply rising long-term bond yields subjected private pension funds, who had been using derivatives-based strategies for duration-matching the assets funding their liabilities, to margin calls well in excess of liquidity buffers. Smaller funds, especially, who had been using pooled vehicles, had little access to ready liquidity. Resulting fire-sale liquidation bonds drove yields higher still, creating a doom-loop in which more liquidations were required. It ended with multiple rounds of bond-buying intervention by the BOE. Unintuitively, the net effect has been to improve the funding ratios of many plans, so a knock-on wave of earnings disappointments is unlikely.