Atop Bank of England official confirmed for the first time that worries that a popular pension fund investment would collapse prompted the intervention by the central bank to buy bonds at a time when it was planning to sell them.
Jon Cunliffe, deputy governor for financial stability, said in a letter to the Treasury Select Committee that worries around what’s called liability-driven investment is what drove the bank to act.
“Had the Bank not intervened on Wednesday 28 September, a large number of pooled LDI funds would have been left with negative net asset value and would have faced shortfalls in the collateral posted to banking counterparties. [Defined benefit] pension fund investments in those pooled LDI funds would be worth zero,” said Cunliffe.
If LDI funds defaulted, then the collateral — gilts — would’ve been needed to be sold, creating something of a death spiral for U.K. government bonds.