This is continued from our earlier post Pounds & Gilts. Recent reports indicate that UK pension funds are pressing the Bank of England for yet more bond buying to suppress yields to rescue them risky leveraged investments. The investments in question involve a type of derivative known as a “liability driven investment” or LDI. The BOE is resisting, as lower yields would come at the expense of a lower pound, pushing the losses onto a public already struggling with a loss of purchasing power.
The US should be paying close attention. It has serious pension funding problems of its own, and if it doesn’t put its house in order could be next.
This also raises the question: Are risky derivative products like these 2022’s answer to 2008’s subprime slime?