Exeunt: Why does the Bank of England care so much about rise in bond yields?
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Date: September 28th, 2022 8:28 PM Author: free-loading beady-eyed bbw international law enforcement agency
Gilt prices immediately staged a rally, spurring the biggest-ever one-day drop in 30-year yields from 5.06 per cent — the highest in two decades — to 4.01 per cent. In the days before the mini-Budget, they stood at about 3.8 per cent.
Before Wednesday’s injection of relative calm, huge shifts in bond prices were leaving analysts and investors bewildered. “The moves in long-end yields were nothing short of incredible; the gilt market was in freefall,” said Daniela Russell, head of UK rates strategy at HSBC.
(http://www.autoadmit.com/thread.php?thread_id=5201521&forum_id=2#45247436)
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Date: September 28th, 2022 8:30 PM Author: free-loading beady-eyed bbw international law enforcement agency
In the long term, cheaper bonds and higher yields are good for pension funds, because they help them harvest returns for retirees. But in the short term, soaring yields meant thousands of pension funds faced urgent demands for additional funds from investment managers to satisfy margin calls relating to hedging strategies.
As yields began to rise, hedged positions needed to be supported with extra collateral. Pension schemes embarked on a selling spree of liquid assets to meet those calls, including selling bonds, kicking off a vicious cycle of gilt sales. Advisers appealed for help to prevent the gilt market from becoming disorderly and damaging pensions for millions of savers as schemes became forced sellers of assets.
(http://www.autoadmit.com/thread.php?thread_id=5201521&forum_id=2#45247446)
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Date: September 28th, 2022 10:14 PM Author: orange spectacular nibblets mediation
as a poaster noted before, UK pensions were going to get liquidated. part of the rise in yields was due to forced de-risking into an illiquid and volatile market.
aside from the fact that higher yields are bad for the british govt's fiscal situation and economic growth, allowing bond yields to gyrate would have resulted in market participants demanding higher yields (term premia) for owning british bonds going forward. think about it this way: would you stick your neck out to own long-term british bonds if you knew that the govt would let prices fluctuate wildly? probably not. you'd demand compensation for the risk.
this is also why the fed cares about keeping monetary policy predictable and gradual. too much jerkiness would result in higher yields across the board.
(http://www.autoadmit.com/thread.php?thread_id=5201521&forum_id=2#45247915)
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