Thread by @monakdohle

Did the #BoE step in to prevent pension funds from going insolvent? A thread (1/8)

It is very rare that pension schemes themselves go bust. It could be that their deficit is so high that it bancrupts the sponsor, liabilities then would be transferred to the Pension Protection Fund. (2/8)

The irony, and perhaps a real risk is that the PPF has a very significant #LDI strategy, so they will be under a lot of stress too. (3/8)

After speaking to pension funds all day, the biggest risk today was that the volume of collective gilt sales was hitting bond markets too hard creating a vicious circle of rising yields (4/8)

Because of the way #LDI strategies are structured, even a small change in gilt yields can trigger big collateral calls.
Even moderately leveraged pension funds burned through their collateral by Wednesday, according to Calum Mackenzie at @aon (5/8).

Burning through collateral means selling assets you don't want to sell. To get a scale of the potential sell off: The total volume of LDI in the UK is £1.5trn @toby_n predicted in the FT a while back that total collateral calls could be as high as £380bn (6/8).

This is why the BoE is focusing on gilt yields right now, a £380bn sell off would have huge knock on effects across all asset classes from equities to corporate bonds. (7/8).

The takeaway: With a £65bn intervention, the BoE got away relatively cheap. But this might not be the end of the story.. Good night for now! (8/8)