Odd Lots Toby Nangle on What We Just Learned From Gilt Market Madness
Oct 6, 2022
Toby Nangle, an economics commentator and former head of global asset allocation at Columbia Threadneedle, discusses the unprecedented volatility in UK financial markets. He breaks down the massive shifts in government bonds following a controversial mini-budget, and the subsequent Bank of England intervention. The conversation highlights how pension accounting practices contributed to this chaos, revealing insights into market dynamics and liquidity challenges that could shape future investment strategies.
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Pension Scandal and Regulation
- Robert Maxwell's actions left Mirror Group pensioners without pensions, leading to new UK pension regulations.
- These regulations included a minimum funding requirement and changed accounting standards.
LDI and Leverage
- Most pension funds use Liability-Driven Investment (LDI) strategies, including growth and matching portfolios.
- They also use swaps and repo to generate leverage, creating a vulnerability to rapid yield changes.
Liquidity vs. Solvency
- Rising rates usually benefit underhedged pension funds, improving their funding ratios.
- However, rapid rate increases cause liquidity problems due to collateral calls, not solvency issues.