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UK pension funds selling assets

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,The BoE had hoped its bond-buying support measures would create a bazooka so big that nobody would be in any doubt that they would intervene to quell market turmoil, according to a person with knowledge of the matter.

LONDON: UK pension funds are dumping assets to meet margin calls as the Bank of England (BoE) confirmed it will end emergency bond buying, and the reverberations are being felt everywhere from Sydney to Frankfurt and New York.

In the United States, investment-grade corporate bonds are falling, with average prices of around 86 cents (RM4.03) on the dollar compared with 90 cents (RM4.22) on Sept 21.

UK pension funds have contributed to the selling pressure in recent days, according to one Wall Street trading desk.

In Europe, leveraged loans bundled into bonds known as collateralised loan obligations have been under pressure.

In Australia, investors have reportedly been asked to bid on mortgage-backed securities that were being auctioned off. The yield premium on Asian investment-grade dollar notes is at a two-month high and headed for a third day of increase.

UK pensions are selling to meet margin calls on derivatives they used to help ensure they could keep paying retirees even if interest rates changed, using a technique called liability-driven investing (LDI).

The offloading that first began after a spike in gilt yields two weeks ago was renewed this week, when the BoE confirmed that it plans to end an emergency bond buying programme today. Investors are hoping the central bank will back down.

“The market simply doesn’t have the confidence, for now, that the LDI crisis won’t return and has increased concerns that other pockets of leverage may cause issues,” Janusz Nelson, head of Western European Investment Grade Corporate Syndicate at Citigroup Inc said.

“Until we see some stability in the rates market, wherever that may come from, investors will continue to be nervous around their holdings.”

The BoE had hoped its bond-buying support measures would create a bazooka so big that nobody would be in any doubt that they would intervene to quell market turmoil, according to a person with knowledge of the matter.

Limits on the buying were increased to allay any concerns that anyone seeking to tap the programme this week would have difficulties accessing it, the person said, asking not to be identified as the matter is private.

Then traders grew concerned about the end of BoE intervention. Yields on UK government securities tied to inflation, known as linkers, moved out again.

Yields on sterling-denominated investment-grade corporate bonds ballooned to over 7% for the first time since 2009. Their fears intensified on Tuesday when BoE governor Andrew Bailey warned that the programme will end today.

The next day, the BoE made its biggest round of emergency purchases since the intervention began last month.

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