Bloomberg on GBP Inflows, BOE Action
Bloomberg writes about "A £60 Billion Wall of Cash Fuels UK Market Calls for BOE Action." The article explains, "A record flood of cash into UK money-market funds following recent pension sector turmoil is worsening a scarcity of high-quality securities, sparking calls for the Bank of England to take action. An estimated £60 billion flowed into sterling money markets last month, versus just £2 billion in September, according to Crane Data, which specializes in the sector. That's an 'eye-poppingly large' amount that dwarfed funds heading into euro or dollar-denominated equivalents, said Pete Crane, the firm's founder." The piece continues, "While it's not possible to break down precisely where this new cash is from, analysts, including at Fitch Ratings, attribute it mostly to UK pension funds racing to build cash buffers after their leveraged liability-driven investment (LDI) strategies came under stress during September's bond market selloff. This additional demand for cash-proxy assets is exacerbating a pre-existing lack of collateral, leading short-term bonds to become far more expensive than equivalent swaps and causing historic distortions in repo rates last week. That's a problem for dealers and also monetary authorities, since it could hurt the BOE’s tightening of financial conditions." Bloomberg adds, "`Investors took notice last week when BOE Governor Andrew Bailey delivered an unprompted comment on the situation, while his deputy Dave Ramsden went on to reveal that debt sales from the BOE portfolio had been specially tilted toward short-dated securities to ease the collateral squeeze. Those remarks left market participants speculating whether a more targeted response from officials is imminent. 'Although BOE intervention may not be immediate, it is clearly on their radar and could be introduced before the end of the year,' said Imogen Bachra, head of UK rates strategy at NatWest Markets. Pension funds' LDI crisis worsened the collateral scarcity, she noted, adding that while the funds would usually be buyers at the long-end of the bond curve, their current high cash balances 'created a demand for high quality, short-term paper, which is in short supply.'"
