WEBVTT - Toby Nangle on What We Just Learned From Gilt Market Madness 0:00:10.039 --> 0:00:13.440 Hello, and welcome to another episode of the Odd Blots podcast. 0:00:13.480 --> 0:00:16.520 I'm Tracy Alloway and I'm Joe. Wasn't all Joe? We 0:00:16.560 --> 0:00:19.439 need to talk about the UK? Yeah, we definitely do. 0:00:19.560 --> 0:00:21.599 You know. The last couple of weeks, of course, have 0:00:21.680 --> 0:00:25.520 been consumed by the volatility and the pound and the 0:00:25.560 --> 0:00:28.479 guilt market. And I think it's actually good that we 0:00:28.520 --> 0:00:30.520 waited a few days. Maybe it'd a been fun to 0:00:30.680 --> 0:00:33.199 do one right away, but there's so much confusion that 0:00:33.280 --> 0:00:35.400 I actually think for learning something, it kind of helps 0:00:35.400 --> 0:00:38.080 to avoid it a feed. That's my excuse. I'm going 0:00:38.159 --> 0:00:40.839 to start this conversation with a massive caveat, which is 0:00:41.000 --> 0:00:44.839 we are recording on October three. Things can change in 0:00:44.880 --> 0:00:46.960 the couple of days that it takes us to get 0:00:47.000 --> 0:00:49.479 this out, and already things have changed quite a bit. 0:00:49.600 --> 0:00:52.199 So you know, the week before we recorded this, we 0:00:52.280 --> 0:00:55.560 saw massive movements in the UK market. So we saw 0:00:55.760 --> 0:00:59.360 five year guilts at like four point seven percent, which 0:00:59.360 --> 0:01:01.280 was the highest, and two thousand and eight we saw 0:01:01.320 --> 0:01:04.360 an even bigger move in longer dated guilts. I think 0:01:04.400 --> 0:01:07.840 the twenty year was almost five percent. It's now back 0:01:07.880 --> 0:01:11.120 below four percent. The pound reached a record low against 0:01:11.120 --> 0:01:14.679 the dollar. All of this was after the UK unveiled 0:01:14.800 --> 0:01:17.440 a mini budget that featured a bunch of tax cuts 0:01:17.440 --> 0:01:20.520 that were expected to balloon the public deficit at a 0:01:20.600 --> 0:01:23.800 time of inflationary pressure in the UK. Joe, I'm just 0:01:23.800 --> 0:01:26.440 going to make that point. But even then, you know, 0:01:26.760 --> 0:01:29.160 in the one week since all of that happened, we 0:01:29.280 --> 0:01:32.720 now have the UK Prime Minister was trust coming out 0:01:32.800 --> 0:01:35.720 and basically doing a U turn on one big component 0:01:35.760 --> 0:01:38.440 of the mini budget, which was the tax cuts, And 0:01:38.480 --> 0:01:41.400 so we're seeing some relief in the market, but there's 0:01:41.400 --> 0:01:45.959 still this big question over what exactly just happened, right, 0:01:46.040 --> 0:01:48.160 and so it really I mean, the story kind of 0:01:48.200 --> 0:01:51.440 started on September twenty three when those tax cuts were announced. 0:01:51.680 --> 0:01:54.560 It really started accelerating in the middle of the following 0:01:54.600 --> 0:01:58.120 week the Bank of England was forced to essentially enter 0:01:58.200 --> 0:02:01.360 the market. And when you have these big in government 0:02:01.360 --> 0:02:04.280 bond there's always this debate, and you've written about it 0:02:04.360 --> 0:02:07.040 for years. Another context, it's like how much is quote 0:02:07.040 --> 0:02:09.720 fundamental and how much is technical? How much does it 0:02:09.800 --> 0:02:12.600 have to do with market structure verse some sort of 0:02:12.639 --> 0:02:16.440 like meaningful signal about the path of expected inflation or 0:02:16.480 --> 0:02:19.919 the Bank of England policy rates and at times there 0:02:20.000 --> 0:02:22.839 is a deviation, and it seemed at least at one 0:02:22.880 --> 0:02:26.359 point last week that there was a pretty big deviation 0:02:26.440 --> 0:02:30.000 between something like fundamental versus this sort of like technical 0:02:30.120 --> 0:02:33.320 driven market that may have been causing a run of 0:02:33.400 --> 0:02:35.799 sorts in at least one quarter of the market. Right, 0:02:35.880 --> 0:02:38.239 So we are going to be getting into this technicals 0:02:38.320 --> 0:02:42.560 versus fundamentals question with really the perfect the perfect guest. 0:02:42.919 --> 0:02:45.840 We're going to be speaking to Toby Nangel. He is 0:02:45.840 --> 0:02:49.239 an economic and markets commentator who worked in asset management 0:02:49.240 --> 0:02:52.400 for twenty five years, formerly the head of global asset 0:02:52.440 --> 0:02:56.520 Allocation for Columbia thread Needle, also a previous All Thoughts guest, 0:02:56.680 --> 0:03:00.760 and someone who is quite philosophical at times over money 0:03:00.880 --> 0:03:03.239 and what mark, but also apparently can get technical to 0:03:04.040 --> 0:03:07.640 combine the philosophy with the technical, which is a rare combination. 0:03:07.880 --> 0:03:11.040 So I'm looking forward to this conversation. Toby, Thank you 0:03:11.080 --> 0:03:13.480 so much for coming on our bots, Thanks for having me. 0:03:14.040 --> 0:03:16.560 So maybe a basic question to start off with, but 0:03:16.720 --> 0:03:20.880 how remarkable were the events of the previous week or 0:03:20.960 --> 0:03:24.359 so in your mind? Oh my goodness, yeah, I mean 0:03:24.400 --> 0:03:26.760 for the guilt market, There's nothing like that in my career, 0:03:26.840 --> 0:03:29.360 and I was looking back using Bank of England data 0:03:29.400 --> 0:03:31.640 and you can't really find something like it. For the 0:03:31.639 --> 0:03:35.160 part well since the daily data that they have there 0:03:35.200 --> 0:03:39.000 to have the short guilt market completely repriced the Bank 0:03:39.000 --> 0:03:41.400 of England rate path in the way it did. And 0:03:41.400 --> 0:03:44.200 then also the long end kind of go from this 0:03:44.280 --> 0:03:47.840 big bear flattening into this huge bear steepening as you 0:03:47.920 --> 0:03:51.200 had liquidation trades and a and a run dynamic unfold 0:03:51.360 --> 0:03:54.120 with the Bank of England than having to intervene to 0:03:54.240 --> 0:03:56.480 start buying bonds when it's trying to do QT. I 0:03:56.480 --> 0:03:59.560 mean it, there's nothing like it. It's really an extraordinary episode. 0:04:00.040 --> 0:04:03.120 We need to uh talk to Richard Silla, who you 0:04:03.160 --> 0:04:05.880 know history of interest rates going back to two thousand. 0:04:06.120 --> 0:04:09.680 That was one of our first episodes to find something comparable. 0:04:09.760 --> 0:04:12.240 It sounds like it really was wild. And all someone 0:04:12.280 --> 0:04:14.520 has to do is look up a chart of like 0:04:14.800 --> 0:04:17.520 tenure guilt or anything and you just see these multi 0:04:17.600 --> 0:04:20.720 standard deviation moves that are supposed to happen like one 0:04:20.760 --> 0:04:24.040 every hundred thousand years happening a few days. But before 0:04:24.040 --> 0:04:27.080 we even get to like what was really driving last week, 0:04:27.400 --> 0:04:30.479 I'm curious, like in the weeks Prior to this, it 0:04:30.520 --> 0:04:35.560 appears we've been seeing this deterioration of market liquidity, pretty 0:04:35.560 --> 0:04:38.280 big sell off in government bond markets around the world, 0:04:38.640 --> 0:04:42.080 strains starting to emerge with so much tightening from central banks, 0:04:42.120 --> 0:04:45.359 Like going prior to September twenty three, the day of 0:04:45.400 --> 0:04:48.279 the mini budget, what we're conditions like, what was trading 0:04:48.320 --> 0:04:52.000 like in your view in government bonds? So, I mean, 0:04:52.040 --> 0:04:54.640 you quite right. It's in an environment of rising bone 0:04:54.720 --> 0:04:57.000 yields around the world, driven really by by the FED, 0:04:57.080 --> 0:04:58.719 but also what's going on the e CP and what's 0:04:58.760 --> 0:05:01.800 anticipated to happen in the UK. From what I understand, 0:05:01.839 --> 0:05:04.920 I mean, liquidity hasn't been amazingly good, but there was 0:05:05.080 --> 0:05:08.400 nothing that I heard that was pointing to a complete 0:05:08.400 --> 0:05:11.160 collapse or anything like that. I can see Joe is 0:05:11.200 --> 0:05:15.160 setting up his his argument for later. It turned out 0:05:15.160 --> 0:05:18.440 everything was fine. I have no argument anymore. Okay, okay. 0:05:18.480 --> 0:05:22.440 So the Bank of England stepped in, which provoked a 0:05:22.480 --> 0:05:26.920 whole bunch of commentary about things like fiscal dominance, and 0:05:26.920 --> 0:05:30.960 the accepted explanation or narrative for why they stepped in 0:05:31.040 --> 0:05:34.719 now is because something was going on with pensions and 0:05:34.800 --> 0:05:37.440 basically we were getting this sort of like self fulfilling 0:05:37.560 --> 0:05:41.960 cycle of yields going up, pensions having to sell stuff 0:05:42.040 --> 0:05:44.760 off and then yields go up more. Can you walk 0:05:44.839 --> 0:05:47.600 us through exactly what the issue was there? Yeah? Sure. 0:05:47.760 --> 0:05:50.039 So in the UK market as the management market, the 0:05:50.040 --> 0:05:53.440 biggest segment by by far, something's called liability driven investment 0:05:53.520 --> 0:05:55.760 or l d I. And to understand that you have 0:05:55.839 --> 0:05:58.159 you need to kind of rewind. Probably about twenty five 0:05:58.200 --> 0:06:00.440 years there were these moves in the way of this 0:06:00.480 --> 0:06:03.159 guy called Robert Maxwell, who's probably best known today in 0:06:03.320 --> 0:06:07.799 the North American audience for being Jolne Maxwell's father. He yeah, 0:06:08.200 --> 0:06:12.840 so he ran a media empire, the Mirror Group, and 0:06:13.080 --> 0:06:16.400 before he fell off his yacht and drowned near the 0:06:16.400 --> 0:06:20.880 Canary Islands, he'd fraudently taken hundreds of millions of pounds 0:06:20.920 --> 0:06:24.040 from the Mirror Group pension scheme, leaving those pensioners basically, 0:06:24.120 --> 0:06:27.080 you know, without a pension. So it's a huge scandal 0:06:27.160 --> 0:06:29.800 caused of bankruptcy of that media empire and a big 0:06:29.839 --> 0:06:33.040 bailout of the Mirror pension scheme. So then you kind 0:06:33.040 --> 0:06:36.160 of bring in this minimum funding requirement for UK pensions. 0:06:36.560 --> 0:06:39.200 At the same time, accountancy standards are changing. You have 0:06:39.240 --> 0:06:41.599 this thing called FRS seventeen, which goes to f RS 0:06:41.640 --> 0:06:44.080 one or two in the in the UK, or International 0:06:44.120 --> 0:06:47.840 Accounting Standard i S nineteen for global, which kind of says, 0:06:48.080 --> 0:06:50.359 do you know what a pension is? Sort of like 0:06:50.400 --> 0:06:53.760 a deferred piece of payment for an employee. It's like 0:06:53.800 --> 0:06:56.120 a it's like a long series of zeros, right a lot. 0:06:56.160 --> 0:06:58.400 I mean, as in a long zero coupon bonds, So 0:06:58.480 --> 0:07:01.320 we should probably value them like long zero. So we 0:07:01.440 --> 0:07:03.200 get a bunch of actories to work these things out 0:07:03.240 --> 0:07:06.279 and then discount them back using bondials. So suddenly, you know, 0:07:06.440 --> 0:07:09.360 you had financial statements that were full of fluctuating pension 0:07:09.400 --> 0:07:12.840 fund mismatches of assets and liabilities, and at the same 0:07:12.880 --> 0:07:15.160 time you had this regulatory pressure to say, you know, 0:07:15.360 --> 0:07:18.120 you probably don't want to have your pension fund hugely underfunded. 0:07:18.280 --> 0:07:21.000 You can invest in anything you want, but if you've 0:07:21.000 --> 0:07:23.200 got a big funding deficit, then you've got to present 0:07:23.240 --> 0:07:25.960 a recovery plan, which might mean over that period you 0:07:25.960 --> 0:07:27.920 can pay no dividends, you can't do em any m 0:07:27.960 --> 0:07:30.520 and a we might say you can't change people on 0:07:30.560 --> 0:07:32.720 your board. All these kind of things that firms don't 0:07:32.720 --> 0:07:35.560 want to do, and so firms go, well, how do 0:07:35.600 --> 0:07:37.920 we deal with this? And number one, they kind of 0:07:37.920 --> 0:07:40.880 shut down their pension schemes for new entrance, and number 0:07:40.920 --> 0:07:44.320 two they look to better match their assets and the liabilities, 0:07:44.640 --> 0:07:48.040 their liabilities looking bond like. So this is kind of 0:07:48.080 --> 0:07:51.240 like the deep history of it. Now, what's has got 0:07:51.280 --> 0:07:56.000 to do with derivatives? And last week, well pretty much 0:07:56.200 --> 0:07:59.680 almost every pension fund couldn't quite afford to match their 0:07:59.680 --> 0:08:02.760 assets and the liabilities. So what they do instead is 0:08:02.800 --> 0:08:05.600 they they have a growth portfolio which is kind of 0:08:05.600 --> 0:08:08.600 low volatility that they should beat cash over time, and 0:08:08.600 --> 0:08:10.640 then they've got a matching portfolio and that might be 0:08:10.680 --> 0:08:14.040 long data guilts. Now the liabilities look a lot like 0:08:14.120 --> 0:08:16.720 long dated guilts in so far as a long dated 0:08:16.760 --> 0:08:20.640 about twenty five year duration instruments, right, but they might 0:08:20.680 --> 0:08:24.680 only have like in the matching assets and in low 0:08:25.120 --> 0:08:27.920 volatility growth assets. So what they do is they put 0:08:27.920 --> 0:08:31.000 an overlay over the rest of it, using swaps or 0:08:31.160 --> 0:08:33.880 doing kind of repo on that on that matching portfolio 0:08:33.960 --> 0:08:37.480 to to to generate leverage. And the leverage varies a lot, 0:08:38.160 --> 0:08:39.559 like you know, it would be up to like of 0:08:39.600 --> 0:08:58.800 a four four times for the larger schemes. What gets 0:08:58.840 --> 0:09:03.280 through the mechanics? Actually, yeah, what happened, Setting aside the 0:09:03.360 --> 0:09:07.560 craziness of last week, what happens mathematically for the pensions 0:09:07.640 --> 0:09:10.720 when rates go up as they have been this year. Okay, okay, yeah, 0:09:11.120 --> 0:09:13.400 So if you have a pension fund, it's called assets, 0:09:13.440 --> 0:09:15.600 which will be financial securities and other stuff, and then 0:09:15.720 --> 0:09:18.000 we have liabilities. So let's say at the beginning of 0:09:18.000 --> 0:09:22.040 the year, your pension fund and your assets are one hundred, 0:09:22.320 --> 0:09:26.880 and your liabilities are hundred long dated bond yields rise up, 0:09:26.960 --> 0:09:28.839 you know, a lot. Let's say there rise a hundred 0:09:28.840 --> 0:09:31.679 basis points in your and your and your liability to 0:09:31.720 --> 0:09:34.920 got duration. So now your liabilities are only seventy five 0:09:34.960 --> 0:09:38.920 in present value terms. Now your assets they would have 0:09:39.000 --> 0:09:41.840 maybe fallen a bit because great hasn't been fantastic, but 0:09:41.960 --> 0:09:45.040 also on the on the liability side, those guilts have 0:09:45.080 --> 0:09:48.000 been worth less, and then the swap overlay is worth less. 0:09:48.040 --> 0:09:51.160 So what mathematically will have been happening during the year 0:09:51.559 --> 0:09:54.360 is it pretty much every month they'll probably be rebalancing 0:09:54.840 --> 0:09:57.280 so that they get back to being fully hedged and 0:09:57.400 --> 0:09:59.520 they don't have any kind of crazy stuff going on. 0:09:59.760 --> 0:10:03.280 So Just to be clear, the value of the assets 0:10:03.679 --> 0:10:06.320 has in a rising rate period, the value of the 0:10:06.360 --> 0:10:11.080 assets has fallen, but if it's orderly, it's okay because 0:10:11.280 --> 0:10:15.280 by the accounting standards, the total value of the obligations 0:10:15.320 --> 0:10:18.120 has fallen as well. Absolutely. I mean, we think of 0:10:18.160 --> 0:10:21.440 pensions as investors, but what they're really trying to do 0:10:21.480 --> 0:10:23.560 is they're trying to solve their problem. And their problem 0:10:23.800 --> 0:10:26.600 is that they don't want to leave their beneficiaries with 0:10:26.679 --> 0:10:30.840 an unsecure outcome, right, So that means that they don't 0:10:30.840 --> 0:10:32.520 go around going, oh, how do I duce a little 0:10:32.520 --> 0:10:35.000 bit more out of this? Or that they're thinking how 0:10:35.040 --> 0:10:37.920 can I get my funding ratio into a better place, 0:10:38.280 --> 0:10:40.480 And if they've got their funding ratio in a great place, 0:10:40.520 --> 0:10:43.320 then they don't really care what yield are doing. So 0:10:43.440 --> 0:10:45.480 this is like, you know, it's fine ld I works 0:10:45.480 --> 0:10:47.280 fine in low yield environment, it works fine, and high 0:10:47.320 --> 0:10:50.880 yeld environment it doesn't work fine if you move from 0:10:50.920 --> 0:10:54.360 a low yielding environment to high yelding environment super super quickly, 0:10:54.679 --> 0:10:56.240 And maybe we should have a look at them account 0:10:56.320 --> 0:10:57.960 to that. Well, So this was going to be my 0:10:58.040 --> 0:11:02.000 next question, what exactly how happens in that scenario when 0:11:02.040 --> 0:11:05.079 you get a sharp move or yields move very quickly. 0:11:05.640 --> 0:11:08.280 And when you have that type of volatility, is it 0:11:08.400 --> 0:11:13.320 a problem because of the optics related to the pension fund? 0:11:13.360 --> 0:11:15.920 You know, no one wants to say that they're underfunded 0:11:15.960 --> 0:11:17.960 and then have a bunch of press written about that, 0:11:18.080 --> 0:11:20.440 or be restricted in what they can do going forward, 0:11:21.080 --> 0:11:24.199 or is it a problem in terms of technical stuff 0:11:24.240 --> 0:11:27.040 that they have to do, like stump up more collateral 0:11:27.120 --> 0:11:30.360 to cover some of those swaps that you just described. Okay, 0:11:30.520 --> 0:11:33.760 it's it's the second one. But also importantly, in a 0:11:33.800 --> 0:11:35.960 thing which hapn't said yeah far, it's quite important, is 0:11:36.000 --> 0:11:40.640 that they tend to actually be underhedged. So rising yields 0:11:40.720 --> 0:11:44.440 actually helped their funding ratios, so that that kind of 0:11:44.520 --> 0:11:46.240 hypothetical scheme in the beginning of year, which had a 0:11:46.280 --> 0:11:50.520 hundred assets and hundred liabilities now has seventy five liabilities. 0:11:50.720 --> 0:11:55.000 It might actually have eight assets rather than and so 0:11:55.080 --> 0:11:57.800 it's actually in a much much better funding ratio than 0:11:57.840 --> 0:12:01.400 it was before. There's this being windfull gain that's come 0:12:01.440 --> 0:12:04.080 through even though the assets are fallen. Right, it's winning 0:12:04.160 --> 0:12:07.040 if you like. So from the optics, the optics are good, 0:12:07.440 --> 0:12:11.000 but then there can be the mechanics and like really annoyingly, 0:12:11.120 --> 0:12:15.160 there are kind of three different ways at least which 0:12:15.160 --> 0:12:17.720 they kind of implement, but let's just focus on Let's 0:12:17.720 --> 0:12:21.079 focus on like two max. Ok So, one of which 0:12:21.160 --> 0:12:24.120 is that they they implement directly, so they have that 0:12:24.240 --> 0:12:27.079 matching pool of assets like guilts and then the growth 0:12:27.120 --> 0:12:30.120 pool with like a swap overlay or repo on on 0:12:30.160 --> 0:12:34.600 the matching assets. Now they've effectively got gearedlong data guilts, 0:12:34.760 --> 0:12:37.720 and when guilt prices fall a lot very quickly, that's 0:12:37.720 --> 0:12:40.440 gonna make the collateral worthless. Also, the P and L 0:12:40.640 --> 0:12:43.840 on the derivative overlay will be sharply into negative, so 0:12:43.840 --> 0:12:45.920 you're going to have to put up more collateral and 0:12:45.920 --> 0:12:49.320 the collatteral is worthless um and and so that's gonna 0:12:49.320 --> 0:12:52.000 be a problem that there's going to be liquidity situation there. 0:12:52.760 --> 0:12:56.200 It's not a funding solvency or funding ratio issue, but 0:12:56.240 --> 0:12:59.439 there's a liquidity problem there. So that's that's one route. 0:12:59.520 --> 0:13:01.719 The second route is something which I think a lot 0:13:01.760 --> 0:13:04.160 more schemes have had problems with, which is a they're 0:13:04.160 --> 0:13:06.360 not big enough to have is doas in place with 0:13:06.440 --> 0:13:09.480 the counterparties and then having like swaps going place. So 0:13:09.520 --> 0:13:11.520 what they do is they go to a an asset 0:13:11.520 --> 0:13:14.559 manager that has a solutions are and and the asset 0:13:14.600 --> 0:13:16.959 manasion says, you know, I'll tell you what. We'll take 0:13:17.000 --> 0:13:19.200 a hundred pounds and we'll put seventy five pounds in 0:13:19.200 --> 0:13:21.760 this growth portfolio, and we'll put twenty five pounds in 0:13:21.760 --> 0:13:26.080 this pooled leverage matching fund which has all the leverage 0:13:26.160 --> 0:13:29.000 within it and there's nothing outside that along with like 0:13:29.360 --> 0:13:34.199 a hundred other pension schemes. Now, if you as a 0:13:34.240 --> 0:13:36.880 pension scheme with your hundred pounds, you've got liquidity to 0:13:36.960 --> 0:13:38.800 make sure that you can put in more collateral if 0:13:38.840 --> 0:13:41.480 you need to, because you know your your funding ratio 0:13:41.520 --> 0:13:44.120 is improving. This is great, and so you all set 0:13:44.160 --> 0:13:47.439 up fantastically. But maybe some of those other schemes they 0:13:47.440 --> 0:13:50.880 don't have liquidity. Maybe they're invested in private credit or 0:13:50.960 --> 0:13:54.400 infrastructure or other long term types of things which don't 0:13:54.400 --> 0:13:57.760 have great liquidity. Now, if the asset manager says, okay, 0:13:57.800 --> 0:14:00.600 you know, we've we've got we've got to recapitalize nation events, 0:14:00.760 --> 0:14:03.560 so you need to transfer more funds in, then they're 0:14:03.600 --> 0:14:06.480 unable to do anything about it. And so they heads 0:14:06.520 --> 0:14:09.120 just starts to fall away, even if the whole structure 0:14:09.160 --> 0:14:12.520 within those pool funds is maintained. But the asset manager 0:14:12.800 --> 0:14:15.040 sometimes might even kind of go, do you know what, Like, 0:14:15.120 --> 0:14:17.400 you know, we're not going to get recapitalization for most 0:14:17.440 --> 0:14:20.240 of these, we might just decide to deliver them ourselves. 0:14:20.760 --> 0:14:23.200 And that's what you saw, I think one of the 0:14:23.200 --> 0:14:25.760 announcements over we can come out from a large asset manager. 0:14:26.520 --> 0:14:28.840 I just have a million questions, but I'll start and 0:14:29.120 --> 0:14:30.840 just to sort of recap what you're saying. You know, 0:14:31.000 --> 0:14:34.560 sometimes in market, sometimes I'm skeptical of it, but sometimes 0:14:34.600 --> 0:14:38.840 in market people make a distinction between a liquidity crisis 0:14:39.280 --> 0:14:41.920 and a solvency crisis. And so just to be clear, 0:14:42.720 --> 0:14:46.600 what you described is it seems like a fairly clear 0:14:46.680 --> 0:14:50.680 example of what should be categorized as a liquidity crisis, 0:14:50.720 --> 0:14:54.600 because in some cases maybe the move and rates improved 0:14:54.600 --> 0:14:58.720 the overall solvency and created a gap between the value 0:14:58.720 --> 0:15:01.440 of the assets today and the applic asians, but the 0:15:01.480 --> 0:15:03.640 mechanics of it, and you just you know, there were 0:15:03.680 --> 0:15:07.720 several different avenues. This really sounds like liquidity was the 0:15:07.800 --> 0:15:13.160 key issue here. That's absolutely right, Joe. And moreover, the 0:15:13.280 --> 0:15:17.240 only route for liquidity for some of these was actually 0:15:17.320 --> 0:15:21.840 selling long dated guilts or unwinding long dated swaps, which 0:15:21.960 --> 0:15:24.360 which kind of then then boils down to like you 0:15:24.400 --> 0:15:27.080 know this the Bank of England when they intervened, they 0:15:27.080 --> 0:15:30.480 weren't doing it to bail out pension schemes. It might actually, 0:15:30.520 --> 0:15:34.080 I think, I think, actually genuinely it will have disadvantaged 0:15:34.400 --> 0:15:39.600 large numbers of pension schemes materially by their actions. It tracy, 0:15:39.680 --> 0:15:41.880 you know, I'm thinking it feels like this is actually 0:15:41.880 --> 0:15:44.360 a common theme this year, and I'm thinking, like some 0:15:44.480 --> 0:15:48.320 of the commodity volatility that earlier in the year, where 0:15:48.360 --> 0:15:52.960 you have these commodity producers they were actually benefiting from 0:15:53.000 --> 0:15:56.119 a sort of solidcy basis by the fact that commodities 0:15:56.120 --> 0:15:59.320 were surging, but due to the funding cost of their hedges, 0:15:59.680 --> 0:16:03.240 were risk of going bankrupt despite favorable commodity right, and 0:16:03.280 --> 0:16:06.440 also just the pro cyclicality of margin calls, which is 0:16:06.480 --> 0:16:09.280 something we also saw in the commodities market. Okay, So 0:16:09.800 --> 0:16:13.320 on that note, Toby, you just mentioned the BOE coming in. 0:16:13.760 --> 0:16:17.840 What exactly did they do first off, and is it 0:16:17.960 --> 0:16:22.040 quie or not and why does it matter? And then secondly, 0:16:22.400 --> 0:16:24.760 what impact has that had on the pension fund. So 0:16:24.800 --> 0:16:28.320 you mentioned that it might actually have been negative for 0:16:28.360 --> 0:16:31.080 them in terms of a funding perspective, but it would 0:16:31.080 --> 0:16:34.160 have broken the liquidity margin called doom loop that you 0:16:34.240 --> 0:16:37.600 just described. Yeah, that's that's right. So the Bank of 0:16:37.600 --> 0:16:40.640 England they saw that this doom look was in place 0:16:40.800 --> 0:16:43.120 and that you don't know where that's going to lead, right, 0:16:43.160 --> 0:16:46.400 that could that could undermine the entire financial system. So 0:16:46.600 --> 0:16:49.800 they intervened with an announcement that they would do daily 0:16:49.840 --> 0:16:53.280 auctions of up to five billion pounds each in long 0:16:53.360 --> 0:16:56.120 dated securities, and they did their first auction and I 0:16:56.120 --> 0:16:58.120 think it was like just over a been was was 0:16:58.120 --> 0:17:01.800 was offered, but the announcement just collapsed long yields by 0:17:01.960 --> 0:17:04.520 a hundred basis points, I mean a huge move. I mean, 0:17:04.560 --> 0:17:06.520 if you've got twenty five year duration in this stuff, 0:17:06.560 --> 0:17:11.240 that's a percent price jump just on the announcement, which 0:17:11.320 --> 0:17:13.920 is just phenomenal. So so that's what they're technically doing. 0:17:14.000 --> 0:17:17.200 Is that quee um. I think that technically you could 0:17:17.200 --> 0:17:19.440 talk about it as balance sheet enlargement, but I think 0:17:19.480 --> 0:17:23.199 it's it can only be understood as a lender of 0:17:23.240 --> 0:17:26.320 last resort, or rather market maker of last resort function 0:17:26.400 --> 0:17:29.040 that it's stepping in to do. It's protecting the financial system. 0:17:29.080 --> 0:17:32.240 It's not trying to reverse QT in it anyway. And 0:17:32.359 --> 0:17:35.280 you know, I think actually it was. They executed it 0:17:35.320 --> 0:17:38.399 and the results are probably way beyond their expectations. And 0:17:38.440 --> 0:17:40.480 then the second question was about like what was the 0:17:40.480 --> 0:17:44.480 impact on pension funds. Well, some some of these these 0:17:44.520 --> 0:17:47.480 pension funds will being cleared out of their hedges, whether 0:17:48.560 --> 0:17:51.920 through their choice or through their managers choices, up when 0:17:52.119 --> 0:17:56.160 long dated yields were above five percent. And so if 0:17:56.200 --> 0:17:57.840 you think of that, you know that fund that's feeling 0:17:57.880 --> 0:18:01.440 really great because it's it's assets are fallen by year 0:18:01.440 --> 0:18:04.479 to day, but it's liabilities are down twenty five year 0:18:04.520 --> 0:18:07.720 to date, and you have like the assets and liabilities 0:18:07.720 --> 0:18:10.400 going up and down in this roller coaster together. Well, 0:18:10.400 --> 0:18:13.480 the assets just fell out when the game unbledged and 0:18:13.520 --> 0:18:16.879 the liabilities rose back up hugely after the Bank of 0:18:16.920 --> 0:18:21.600 England intervention. And so that windfall gain which might have 0:18:21.680 --> 0:18:25.000 come from rising yields, because that's a little bit under hedge. 0:18:25.200 --> 0:18:28.200 I don't know the impact like system systemically, and I 0:18:28.240 --> 0:18:31.480 don't think anyone knows the impact systemically yet as see 0:18:31.480 --> 0:18:33.919 what the hits being for them. Hopefully it's small. I 0:18:33.920 --> 0:18:35.920 think in the macreconic terms it will be small, but 0:18:36.000 --> 0:18:39.840 it will be hugely painful for for a number of schemes. 0:18:39.880 --> 0:18:42.920 So I'm thinking back to in the US in UH 0:18:42.920 --> 0:18:45.280 and I guess elsewhere, but in the US and spring 0:18:46.440 --> 0:18:49.560 on set of the pandemic, and it was a similar 0:18:49.600 --> 0:18:55.399 situation with leverage hedge funds that are cash treasuries versus futures, 0:18:56.040 --> 0:18:58.760 and the FED head to step in and restore calm 0:18:58.800 --> 0:19:00.879 to the market. And then you know that people have 0:19:00.920 --> 0:19:03.400 talked about the idea of like a standing repo facility 0:19:03.560 --> 0:19:05.920 such that at any given time you can just get 0:19:05.960 --> 0:19:09.000 liquidity for what, within any given systems should be the 0:19:09.119 --> 0:19:13.199 safest most liquid asset. Would something like that in the 0:19:13.320 --> 0:19:16.720 UK had it? Is there anything equivalent to that in place? 0:19:17.320 --> 0:19:21.399 Or would something like that be useful such that the 0:19:21.520 --> 0:19:24.240 central bank doesn't have to make ad hoc decisions about 0:19:24.240 --> 0:19:27.000 when to step in, but allow players to at any 0:19:27.040 --> 0:19:31.320 time get central bank liquidity for their guilt. So I 0:19:31.359 --> 0:19:33.640 don't think that there was I mean, I could be wrong, 0:19:33.680 --> 0:19:36.639 so I'm gonna caveat that, but I don't think that 0:19:36.680 --> 0:19:39.040 there was a problem about getting liquidity feel guilt. I 0:19:39.040 --> 0:19:41.199 don't think that people were wondering, you know, how do I, 0:19:41.240 --> 0:19:43.600 how do I get finance for this. It's more that 0:19:43.880 --> 0:19:47.000 owing to the structure of the leverage, the value of 0:19:47.000 --> 0:19:49.640 the guilts had had reduced such that, you know, they 0:19:49.680 --> 0:19:52.639 just didn't have enough collateral. I mean, consultants will we 0:19:52.640 --> 0:19:54.159 talked about you know, I was speaking to a c 0:19:54.280 --> 0:19:56.840 i OVA of an investment consultant for a piece I 0:19:56.880 --> 0:20:00.520 read in in July setting up this whole yeah, concern 0:20:00.600 --> 0:20:03.280 about l d I. And he told me, listen, one 0:20:03.320 --> 0:20:07.359 of my clients had one point five billion pounds of 0:20:07.480 --> 0:20:10.879 excess collateral when guilt yields were down at the lows 0:20:11.000 --> 0:20:14.320 during the pandemic. They've now got zero and they need 0:20:14.359 --> 0:20:16.840 to get another billion pounds collateral call to come through, 0:20:16.920 --> 0:20:19.720 so they're selling things that was in June, right, that 0:20:19.800 --> 0:20:22.080 was the effect of what had happened through then. So 0:20:22.119 --> 0:20:24.920 you had let's say that twenty five which was guilts, 0:20:24.960 --> 0:20:27.080 you might have only needed ten to put in that 0:20:27.119 --> 0:20:29.719 pot for collateral, and that then fifteen could have been 0:20:29.800 --> 0:20:32.600 excess collateral. Then you know, as as yields rise, so 0:20:32.640 --> 0:20:35.520 your excess collateral shrinks down and then you need to 0:20:35.600 --> 0:20:38.399 replenish it, you need to rebalance. And these things can happen, 0:20:38.560 --> 0:20:40.359 you know, they can. It can cause a little bit 0:20:40.400 --> 0:20:43.800 of strains on the system. But they can happen over months, 0:20:43.840 --> 0:20:47.520 but they can't happen over forty eight hours. So speaking 0:20:47.520 --> 0:20:52.160 of collateral calls, which is basically a synonym for forced deleveraging, 0:20:52.320 --> 0:20:54.560 I know, we we talked about the sort of doom 0:20:54.600 --> 0:20:57.800 loop of you know, yields going up and so pension 0:20:57.800 --> 0:21:01.080 funds have to sell more guilt and then that forces 0:21:01.160 --> 0:21:03.679 yields to go up more, particularly at the long end. 0:21:04.040 --> 0:21:07.480 But we've also seen some chatter about other assets being 0:21:07.520 --> 0:21:11.800 sold to satisfy these margin requirements. What have you seen there? 0:21:11.800 --> 0:21:14.679 I've seen talk of credit, you know, specifically some e 0:21:14.760 --> 0:21:18.200 t F given that they're more liquid than underlying cash bonds. 0:21:18.280 --> 0:21:21.160 But also I've seen people talk about the impact going 0:21:21.240 --> 0:21:25.760 as far as the Australian mortgage market. Last week, Yeah, yeah, 0:21:25.760 --> 0:21:29.600