Kwasi Kwarteng’s mini-budget continues to spook investors

If government bond sales by pension funds are the fundamental cause of a potential systemic crisis that could hurt us all, as the Bank of England says, why are pension funds taking so little advantage of the Bank’s offer to buy £65 billion of the bonds? And why are bond prices still falling?

It seems to me the only explanation for what is happening is that margin calls on pension funds’ liability-driven investments (LDIs) – or the trillion pounds of their debt that’s secured against UK government bonds – are not, in fact, the main cause of the spike in bond yields, or at least they are only a small part of it. It is the other way round.

The spike in bond yields is prompting margin calls, which is then causing pension funds to sell assets, of which gilts are only part. This is not a market’s tail wagging the economic dog, as to an extent happened in 2007/08, but an economic dog, high on fiscal stimulus, biting off its markets tail.

If that is the case, you would not expect the pension funds to use much of the Bank of England’s £65 billion facility, because they are flogging other stuff to cover bond losses.