Market moves: Liz Truss sacks Kwasi Kwarteng, with Jeremy Hunt installed as chancellor; JPMorgan estimates market-to-market losses from liability-driven investment derivatives could hit $167bn (£149bn); and schemes rush to prepare as the Bank of England ends its bond-buying programme.
Kwarteng out, Hunt in
Kwarteng was removed as chancellor on October 14, with former health secretary Hunt brought in to replace him in a bid to shore up Truss’s position as prime minister.
In a press conference, Truss reaffirmed her commitment to delivering a “low-tax, high-wage, high-growth economy”, then announced a U-turn on tax measures in the so-called “mini” Budget that will see corporation tax rise to 25 per cent.
She acknowledged the need to reassure markets of the government’s fiscal discipline, and pledged that its medium-term plan will be accompanied by a forecast by the Office for Budget Responsibility.
Markets responded aggressively to the drama unfolding in Westminster. The yield on 30-year gilts fell before Kwarteng’s dismissal, before rebounding to trade at 4.79 per cent.
LDI derivatives losses
Reuters reported analysis from JPMorgan suggesting that market-to-market losses from LDI derivatives since August could total between £125bn and £150bn.
Soaring bond yields following the “mini” Budget on September 23 prompted pension schemes to sell assets to cover their LDI derivatives positions, leading to fears — that the Pensions Regulator has since dismissed — of a “doom spiral”.
JPMorgan analysts said there was “little sign of significant funding stress” from widening dollar cross-currency basis swaps in the fallout from the shock.
Schemes bolster their defences
The Financial Times reported that sterling money funds had gathered £53bn in a fortnight as schemes prepared for the end of the BoE’s bond-buying programme.
The use of money funds indicates the widespread selling of assets as schemes attempt to cover any subsequent collateral calls, with cash essential given the number and size of schemes using LDI strategies to match their assets and liabilities.
Sterling money fund assets registered £251bn on October 11, up 27 per cent from September 28, the day the BoE began its intervention. Despite contradictory rumours, the central bank’s programme came to an end on October 14 as planned.
