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The market chaos caused by the sell-off in U.K. government bonds should settle down following this week’s emergency intervention by the Bank of England, said Ronald Wuijster, chief executive of APG Asset Management, one of the largest pension investors in the world.
On Wednesday, the BOE stepped up to buy long-term-bonds or gilts over the next two weeks, in a bid to shore up financial stability.
The move came after the pound fell to an all-time low against the dollar and government bond prices slumped, in reaction to the new U.K. government’s fiscal policy announcements which included unfunded tax cuts.
There was panic among some pension funds, and some of the bonds held within them quickly lost value.
In order to top up the collateral on these bonds, some funds had to raise cash but due to the speed of this crisis, many funds were caught out and were forced to liquidate their next most liquid assets, long-term bonds or gilts, causing prices of bonds to fall even more.
“The power of the central bank is sufficient, I think, to make it settle down,” Wuijster told CNBC’s “Squawk Box Asia” on Friday, adding there has been no panic for APG.
“One can never exclude that with rising interest rates, these things happen but our situation is quite different. Our pension funds have interest rates swap positions as well.”
“We do a lot of stress testing to see what could happen during this situation so we’re well prepared, we’re able to generate lots of liquidity to deal with a situation like that.”
APG invests in gilts for its funds, but it does not have many gilt positions for liability hedging, Wuijster said. Liability hedging refers to reducing volatility in assets within funds such as pensions, and therefore minimizing risks to investment returns.
Hedging is necessary to ensure pension plan beneficiaries get steady and guaranteed income.
I think [the] worst hit are lower income people … so I think the compensation that was announced in the U.K. is not very much welcomed by market.
Ronald Wuijster
chief executive, APG Asset Management
When asked if pension funds should reconsider using gilts, especially during times of economic uncertainty, Wuijster said that since a pension fund straddles a regular asset management and an insurance product, it is normal for half of the fund to be hedged using these instruments.
A better solution for funds and investors to manage current macroeconomic risks is to be diversified, for example, by investing globally across a range of assets, Wuijster said.
The CEO said it’s not likely the same thing could happen to European bonds.
Compared to the U.K., European policy makers have been more moderate in managing their energy crisis and inflation and have been raising interest rates more gradually, Wuijster says, adding that he does not expect a situation like the U.K. to occur in Europe.
The U.K. government said the new tax policies would help boost growth at a time of rising inflation and soaring energy costs. But instead, they were accused of acting purely ideologically, with many economists predicting the cuts would fuel inflation and drive up government debt.
“Mainly compensating a richer people is probably not the smartest idea,” he said referring to the U.K. policies.
“I think [the] worst hit are lower income people — by this energy prices and crisis — so I think the compensation that was announced in the U.K. is not very much welcomed by market.”
The Bank of England said it would commence buying up to £5 billion (about $5.6 billion) of long-dated gilts, or those with a maturity of more than 20 years, on the secondary market from Wednesday until Oct. 14.
