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The primary problem is that the pension funds are leveraged. You are right that eventually the bond value will recover, which is why bonds pension bought are no
by dartmoth89 4y ago
The primary problem is that the pension funds are leveraged. You are right that eventually the bond value will recover, which is why bonds pension bought are not just sitting there, they are used as collaterals for more cash to buy other assets. As their value fell, there will be a temporary issue of banks asking pension funds for more collaterals or the cash back. If the funds didn't have any (and they don't), the options are: a. pensions sell all assets, b. banks sell all collaterals.
- substation13 4y agoYep. An important concept is a "margin call". Funds are allowed leverage but within limits, and when the value of their assets (e.g. bonds) decreases then the leverage can increase. They need to put up more collateral (e.g. cash) to reduce the leverage to within agreed limits. But suppose that many funds are in the same situation at the same time! Now that collateral is more expensive and the leveraged assets are worth less. This can lead to collapses across the sector, which the BoE is very keen to prevent. Hence they intervened to prop up the assets.