Yesterday bond markets saw a revenge relief from the consistent shorting that happened over the week. In this relief, the biggest move came in long-term bonds of the United Kingdom and the cause of it was an intervention by the Bank of England as it started a limited window of bond buying. The coincidence to this was that on 29th September that is today it was going to announce a balance sheet reduction.
Though this is being taken as a “ QE instead of QT” moment, meaning that the central bank has stopped the idea of balance sheet reduction and started to increase it. This also led to a major drop in rate hike odds for all central banks such as ECB odds of a 75bps hike dropped from 90% to 40%. But the statements from members made it clear that the rate hike path and reduction path will not change.
The most critical point to know is the reason that led to such intervention but before that, it is important to understand the mechanism. Government bonds especially long term are taken to be the safest investments asset for larger investment management firms and this includes the largest pension funds. But when these investments go volatile in the wrong direction then these funds panic, as these investments are also used as margin money for other investments of the funds.
And this is exactly the reason why such intervention took place. As the Friday and money move in these investments resulted in a large reduction in value the risk of a margin call was increased, resulting in the pension funds approaching the government for a liquidity window since Tuesday according to some articles. This was aggressively pursued by the funds as the liquidity in the asset went to negligible levels. Though it was in the nick of time opening a limited window provided much-needed relief.
Though it avoided a financial stability risk come true moment like the “Lehman crisis” for the next many months all the market participants will be on their toes for a repeat.