Why global economy is headed for a perfect storm
- A range of global threats loom that should make us brace for worse economic conditions.
Liability-driven investing may prove to be one of those clunky bits of financial jargon, like ‘sub-prime mortgages’ during the Global Financial Crisis, that we are all going to become familiar with. These derivative contracts have been used by UK pension funds to ‘protect’ their investments in bond markets and hedge against swings in interest rates. Unfortunately, the wild rise in UK government bond yields and fall in bond prices after the Liz Truss government unveiled a ‘mini budget’ in late September was so extreme that the pension funds had to raise cash positions, leading to a further drop in bond prices. Disaster loomed for many defined-benefit pension plans that have 10 million members and £1.5 trillion in assets under management; the UK’s central bank was forced to step in. On Wednesday, Bank of England (BoE) officials reiterated that its emergency £65 billion bond-buying programme will end Friday, sending the yield on the 30-year UK bond higher to 5%.