Pension funds, bonds and gilt market stability

Churchill, Jennifer; Bonizzi, Bruno

Abstract

In September 2022 UK gilt yields rose by 130 basis points over the course of a couple of days. Fearing broader financial instability, the Bank of England intervened. These events showcased in spectacular fashion an irony of modern market-based finance: pension funds, often assumed to be the most patient of investors, can in fact be destabilising. Aspects of the episode were down to specific features of UK regulation – a failure of leverage restrictions and the dangers of mark-to-market discount rates to value pension fund liabilities. Other more general features allow broader lessons to be learnt: how pension funds invest, and what they invest in, depends to a large extent on the structural features of the financial system in which they are embedded. More than this, the event takes us to a question of central importance in economies where market finance has been growing: should gilt market stability be a greater priority going forward, given both its financial and political significance? And what role might institutional investors and the central bank play in achieving this stability?

• Deposit Date: Aug 30, 2024
• Publisher: Edward Elgar Publishing
• Book Title: Central Banking, Monetary Policy and Financial In/Stability
• Public URL: https://uwe-repository.worktribe.com/output/12829223
• Contract Date: Jul 10, 2024