Blessed war. Had it not been for the concomitance between the celebrations for the annexation of the four Russian-speaking provinces, the EU Energy Summit, the press conference of the NATO Secretary General and the UN Security Council vote on the consequences of the Russian referendums, the media would have found yourself forced to talk about this,
UK watchdogs hold crisis talks to avert gilts cliff-edge https://t.co/5GXpudrRO9
– Financial Times (@FT) September 30, 2022
UK pension funds ask corporates for cash after gilt blow-up -sources https://t.co/LXboV7PfeB pic.twitter.com/knxiDHtIiU
– Reuters (@Reuters) September 30, 2022
In short, something that could be summed up with a title more or less like this: How Britain has avoided its Lehman Brothers (for now),
Unpleasant. Because if after an emergency intervention of 65 billion potential, the pound returns to weaken, pension funds dump whatever they hold in order not to collapse under the weight of margin calls and regulators are forced into an emergency meeting ahead of next week, something profound Broken is the basis of the system. And the Financial Times he says it outright: British pension funds yesterday dumped stocks and bonds to rake in as much cash as possible and, unable to make price compared to their needs also in light of the sales. they ran to corporate underwriters to ask, in fact, an emergency bailout.
Because the vast majority of the approximately 5,200 funds based on benefit schemes use derivatives as a hedge against rate increases and inflation, instruments which however require cash collateral as a guarantee. And when the market takes a different direction than it was anticipated, the amount of money needed goes up. Exponentially. Exactly how the yields of GILTS, British government bonds, have done in recent days, after the new government decided to respond to high bills and inflation with a thatcherian, as well as a suicidal cut in taxes to reactivate consumption and recovery.
And this graph
Equivalent to UK government bonds available on the market as collateral
Source: Financial Times
plastically shows the magnitude of the emergency sell-off, given the collapse in the market value of Her Majesty’s government bonds available as collateral only in the last few days. And what happened has an explanation as simple as it is disturbing: according to the reconstruction of Financial Timeslarge intermediaries (LDI) between pension funds and banks offering hedging instruments have in fact threatened the British government, forcing it de facto to arm the hand of the Bank of England to save the sector.
BlackRock, for example, clearly made it known that the first margin call would also be the last: no further requests to increase the liquidity to cover, the fund would be immediately liquidated.. In fact, every holding asset sold to cover margin calls. Automatically and regardless of the market conditions in which securities or bonds were offered to potential buyers. As if to say, I sell at 30 on the dollar and that’s okay, just to make cashIn short, despair. Which the government and the central bank have patched up. But, given the dynamics and the need for an emergency meeting of the regulators, it is not enough. And potentially worse than the hole.
Because now this graph is scary:
Trend in the Bank of America’s global market risk index
Source: Bloomberg / Bank of America
which shows how the Bank of America’s global risk indicator has just reached the pandemic peaks. Net of a crisis that, according to many insiders, could sanction a drastic downsizing of private and complementary pension schemes, since it is clear how what happened reveals Pulcinella’s secret of their use as mere tools of liquidity exithere comes the million dollar question: who will be the next? Which domino token will fallbefore a coordinated backstop at the level of global central banks halts the slaughter again, with structural support blows? Needless to say, BTPs appear among the top candidates. Followed closely by Credit Suisse, whose credit default swap yesterday updated the new post-Lehman high.
Performance of Credit Suisse 5-Year Credit Default Swaps
Source: Bloomberg / Zerohedge
And here comes this latest chart
Amount of deposits at the New York Fed reverse repo facility
puts the risk and also the potential, risky strategy that this could imply into a global perspective: a effect September 2019 triggered by the abuse of the reverse repo. On the last day of trading, in fact, they were 108 counterparties to have deposited something like $ 2.426 trillion with the New York Fed facility. New absolute record. But, above all, something that risks opening the Pandora’s box of yet another bluff. Or, worse, yet another false evaluation. In fact, if inflation has been branded for months as transitoryhere is that the reverse repo is still underestimated as a tool today temporary of parking of excess reserves.
But with the put options now bought as fireworks on New Year’s Evehere is what to park billions in a investment in fact, risk-free and remunerated today at 3.05%, it appears a clear systemic hedging strategy and no longer a mere opportunity. In fact, fewer (risky) loans to the real economy and greater and continuous drain of liquidity from the market, as well as a constant erosion of reserves. Which obviously are deposited with the Fed only for 24 hours but during which they are bound, untouchable.
And the British example of pension funds has shown us plastically how situations can precipitate in a flash. Faced with a catalyzing event and a chain of margin calls, all that liquidity blocked at the Fed, what effect would it generate on the market? What is needed for a new September 2019. And, in fact, for the activation of a QE. A paradoxical and very dangerous liquidity crisis generated by its excess, so abundant that it is parked and sealed. Unusable in time of need. Anyone looking for the controlled incident? If so, BTPs appear strongly candidates for the role of sacrificial victim.