by Dave Fairtex
Chris Martenson’s Peak Prosperity
The big market-moving news this week – as you probably know by now – was the solvency problem in the leveraged UK pension funds. (Leveraged? Pension funds???) The UK pension funds were holding UK sovereign debt, the price of which has been plunging (due to rising rates), which wouldn’t normally matter (just hold until maturity, and all is well), unless, of course, they were using a ton of borrowed money to amplify the yield on the bonds. Which, it turns out, is what they were doing.
Why borrow money? Turns out the rates on government bonds were too low for the pension funds to meet their obligations (thanks central bankers), so the pension funds ended up taking much larger risks, using leverage. And using leverage to create a large portfolio of government bonds worked great, right up until the moment the rates on these bonds started to rise rapidly. And then – suddenly – it wasn’t fine anymore. There were (probably) margin calls; bankruptcy beckoned.