Thread by @jsblokland

#Duration works both ways!
#Austria's '100-year' bond, maturing in 2120, with a duration of 46 years, is down a whopping 72% since late 2020 when global yields bottomed.
short thread 1/9

This also answers the many questions about why the value of (UK) #liability-driven investment funds, used by pension funds to match the #duration of their #liabilities, has plummeted. 2/9

Theoretically, since pension fund #liabilities and #assets both drop when #yields rise - it is not called liability matching for nothing - there shouldn't be a problem, right? 3/9

However, to match the #duration of their liabilities, pension funds and their #liability-driven investment funds use leverage. And this means #collateral is involved. 4/9

The amount of #collateral depends on, among others:
- how much leverage is involved
- market #volatility
- the underlying assets functioning as #collateral
5/9

So when #volatility spikes and the value of #collateral - which in the case of #liability-driven investment funds are mostly (government) #bonds - falls, pension funds get a massive 'margin call' to deposit additional collateral.
6/9

When #volatility is high, most of the time, #liquidity dries up. This forced fire sales of assets to free up the additional collateral required.
7/9

First, UK pension funds sold bonds on a massive scale to get additional #collateral, making the problem of spiking bond #yields worse. Then, yesterday, data showed UK pension funds are selling everything they got as #liquidity collapses due to high #volatility.
8/9

Hence, the Bank of England had to step in again and significantly extend its bond market intervention to give UK pension funds time to sort out their mess. But with bond #yields spiking again and significant uncertainties around UK fiscal #stimulus, this is no panacea.
9/9