How Derivatives Ravaged the U.K. Bond Market | WSJ
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- Опубликовано: 4 окт 2022
- Turmoil in the U.K. bond market created a feedback loop that left investors like pension funds short on cash and rippled out into other markets. WSJ’s Chelsey Dulaney explains the type of investment at the heart of the crisis.
Illustration: Ryan Trefes
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#Derivatives #UK #WSJ
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The FED killed the market not retail investors, not their fault, virtue signalling at its worst.
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Comparing interest rate swaps to NFTs is insane.
Thanks for this video - this was clearest explanation I've seen about how the pension funds ran short on cash and ended up needing to be bailed out by the Bank of England.
Fall of the British Empire: Final Season!
As Charlie Munger, Warren Buffett's right hand man once said, "Derivatives are numbers on a screen...and can cause chaos"
really emphasises how fragile the financial markets are! and how just one event can bring the whole house of cards down
There is a fundamental difference between using derivatives to speculate and take leveraged bets vs using derivates as a way to manage risk. A farmer can use derivates to reduce risks around the price they will get for their product. Airlines can reduce risks around the cost of fuel.
@@Peter_Fisher True. However, what happens when the event that everyone is buying insurance on is not an independent event? There really is no market for insurance that is suppose to cover for a dependent event such as rates rising. If rates rise quickly, everyone who is holding fixed income is going to see a huge haircut if the duration on their bonds is greater than the duration of their liabilities.
@@Peter_Fisher Essentially, it was the party offering the swaps to the pension funds that got hosed because their payments were too much since they were providing insurance for a dependent event. Huge mistake.
and the 3 L's : Liquor, Leverage, Ladies 😂😂
Markets will keep tanking for at least the next two years or more. So, immediately get out of these traditionally bullish stocks and put all that money into the inverse ETFs of Nasdaq or Dow or the Financial Sector.
You may make up your loss in a matter of months and thereafter keep making money all the way to the end of recession.
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I just looked up this person out of curiosity, and surprisingly she seems really proficient. I thought this was just some overrated BS, I appreciate this.
But nothing about the idiotic arrangement of posting bonds as collateral for insurance against falling bond prices?
There’s no safe asset!
Thank you, great explanation!
1. I just don't understand why the data analysts at the WSJ, FT and Bloomberg use similar colours to chart graphs!
2. Pension funds and insurance companies - LDI investors - were forced into these risky leveraged trades because the interest rates on their bonds have been infinitesimal for over a decade. The true cause is the BoE and its InfiniQE.
Nicely explained.
Pension funds are the typical long-term investors. Derivatives (e.g. interest rate swaps) are used for tactical purposes. Moreover, a large part of pension fund portfolios are into equities and alternatives. I'm a little confused.
UK Government one year ago: It is illegal for British citizens to use derivatives in Cryptocurrency trading. We want to protect our citizens from losing money.
Also UK government: Lets use our citizens pension money on derivatives (leveraged money) to make money for ourselves and gamble with it.
Amir you expose a huge flaw of Bank of England policy gambling on the Derivatives market is really dumb!.
Uh, derivatives don’t generally need collateral. Trading on margin requires collateral, hence the margin calls… you can enter an IRS without any collateral, so long as you’re not using leverage.
Why would you use blue for all three lines on your graph???? It's unreadable.
@spacetoast7, the censorship is ridiculous!
I replied to your request for a name of a doctor that has been censored but my answers keep getting deleted or hidden!
There are many, but a particularly high profile case is that of Dr William Bay… he was prepared to lose his medical license to print money rather than be silenced
The risk is not CBs raising rates to combat inflation, the risk was expansive monetary and fiscal policies and super low interest rates for so long. Now we just see the consequences and there is no way out.
I understood everything.
did she just say those interest rate swap are hedges? then how come they have a bet on interest to go up when they hold lotsof bond
On the 2 minute mark, do conservative investors like Pension Funds really hold Interest rate swaps, that too in any substantial amount? I can understand they would hold a lot of govt. bonds and any fluctuation in bond prices would affect them. But pension funds and swaps - something doesn't sound right?
Because yields have been low for so long, they've been buying risker assets (e.g. equities) as part of their portfolios to go in search of the returns they need to be able to pay pensioners. But when not holding 100% bonds, they end up at risk of interest rates falling, because it leaves them with a negative funding level (which is a little confusing but it happens because of how liabilities are discounted).
So the solution to that is to use derivatives to go very long on bonds, which is okay when everything is predictable, but a sudden spike in yields like we saw recently can lead to these disastrous runs. You get margin called when bond prices drop, so have to sell more bonds to post extra collateral, which tanks bond prices more, and the spiral gets worse and worse 😵💫
@@laurieho1931 thanks for the short explanation. Is there any detailed info about the negative funding levels and how it works, which you’d suggest? Id love to read more about it
Wrong to say trading derivatives is dangerous. For experts, it’s the same as any other instrument. Bond futures are necessary in the portfolios. Why would WSJ interview a non expert that has uninformed opinions?
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The first time I look at the video’s title, I thought it was calculus derivative (dy/dx)
On May 30th, 2016, I warned people on Facebook to "pay attention to the Derivative's Market. This is the best indicator as to when a financial collapse will occur.
Prepare Accordingly."
In this video it is not specified whether it is a government bond or private bond.
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Banks and pension funds are over leveraged because they know the can increase their ROE and risk, since central banks view them as ‘too big to fail’ which of course leads to moral hazard.
Pension are funded by everyone ☕️? Know emergency crisis. I don't get why world markets are talking about uk pension. uk are strongest markets in the world 🌎
Well that's hilarious to me. George Bernard Shaw once said "Man has learned from history that man cannot learn from history."
@@ferrer65 Why humanity is amazing because we can turn the future into something else 🤣☕️? Should put people down believe everyone alive today is amazing 🥳
I’m so lucky that impulse happened on GBPUSD that Sunday night when the Nikkei opened. 💀 I only was risking .25% per trade and then took a shower and then I came back and made 20k. Thank you hedge funds ☺️
20k, huh? What size was your notional position?
@@displayname2149 in my FTMO account with 200k, on GBP/JPY I sold 3.58 lots at 155.041-151.350. GBP/USD sell 1.5 lots 1.08207-1.05267. I made a total of 15,000 USD combined primarily from GJ. The remaining 5,000 came from spillover in other currencies and equities so I also sold 1.5 lots of AUD and shorted Hang Seng and the Nikkei and that was the remaining 5000 dollars. So the size of the positions were about 200,000 USD considering the size of the contracts.
here is the point, after 14 years interest rates have turned - America is increasing global interest rates, this will hurt anyone with a lot of debt or running unsustainable debt (Sri Lanka) or financial policies based on more debt that lack credibility (UK)
How are you going to stop inflation if OPEC+ is out there manipulating energy and investors are out there manipulating the housing/rental markets.
With shale light and Canadian heavy crude, US can be energy independent and have the surplus to supply Europe. For housing markets, you’ll need to boost interest rates to lower the incentive to use real estate as an investment/savings account.
The US already is energy independent but since energy prices are set on the global market unless they cap prices on both sides of the coin there simply is no way to influence the market.
The only way raising interest rates are going to work is by having double digit interest rates which will bring a lot of pain to main street. Even with that I'm still not confident it'll work if investment funds are cutting deals with homebuilders to buy up supply at a 15-20% discount.
@@briand5379 US net production of crude is far below net consumption. You can find production and consumption data on EIA.
@@briand5379US came from double digit interest rates, at that level investment funds would need to readjust portfolio based on new risk tolerances.
So hedge fund managers are no different from robinhood traders
Just like any other emerging economy.
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I'm a long term investor. I withdrew my profits of over £756,000 during the covid-19 pandemic
This was the fault of the people who asked for the collateral sooner than what was normal.
Why don't governments put cap on max leverage(no matter the instrument)... seems pretty obvious
QE and QT at the same time would mean an empty central bank for England. Obviously one gotta stop ASAP.
trading on leverage and using derivatives are not the same thing. the title derivative is just a headline grab. get your info straight
The wisest thing that should be on every wise individual's list is to invest in different stream of income and don't depend on the government to bring in money especially now the pandemic is hitting the economy
you are definitely right , waiting on the government is a big waste
Investments are the stepping Stones to success especially if you been guided by a professional
Investing is good but investing in the right thing is the actual key to success . who is your pro ?
That was exactly what I did, I trade with a professional stock expert "Karina Mattis " who i met in one of the seminars..
There are so many investment out there but if profits must be considered then not all investments are good to go into.
Why don't they just put in time lags for money?
This is the dumbest way of hedging interest way risks, because your directional risk is the same, you are using non-linear risks assets to hedge linear risks assets
I have posted a video about it
I would hardly call $600 trillion of derivatives “niche”….
Doesn't make sense. Bonds are collaterals. No reason to sell off bonds to gather cash to buy other collaterals. Government bonds can flop in market trading price but they are still the safest of the safest assets without or with-low credit risk unless it's all about trading that they speculate more drop in bonds so they rather sell them to buy back cheaper than pledge them as collateral.
Betting on the outcome of someone else's bet in a loop
Shorting bond night and day
Pension funds trading derivatives? Really, shouldn't the United Kingdom know better? I am American and I know this kind of trading is risky enough; retirement planning services such as a pension (even if it is a public or private pension) should own the physical underlying asset, not speculate per derivatives. (In this case I assume UK government bonds.)
Interest rate swaps aren't used to speculate on bonds, they're more used to hedge against market volatility
@@vineetpatel8512 yes, the pension funds were using options or derivatives to speculate on the bond market as per the video commented on.
The UK has finally become irrelevant.
They were not speculating - they use LDI to protect a schemes funding level against movement in inflation and interest rates. LDI portfolios are designed to move in the same direction as the PV of livabilities. This video has only explained the asset movement side which is potentially misleading.
@@CBCSolutions Statistical analysis is used in many prediction programs and portfolio schema (including as assumed of LDI being Liability-driven investing.) So, yes, this "scheme," or at least to cover the asset's loss or gain is speculation. Sure the R-squared might be high enough to give many positive results in common market conditions; but when did a recession happen as predicted? A low or no number of times. I agree that present value (PV) is predictable when the market is so as well; but shortfalls and winfalls happen especially when central bank interest rates were at record historical lows. So, what level should LDI (and other similar portfolios) cover for change in present value and other risk factors? Asset insurance as an answer to derivative markets or physical holdings such as pension and mutual funds? Not entirely sure; because; this was totally predictable as the math does not work when inflation or interest rates spike and would produce an outlier (or sustained outliers in our present time today) to create the shortfall.
so in the UK pension funds gamble with the money of the people ??? is that right ?? SCARY !!!!!!!!!!!! How on earth is that alloed in your country ??
and why are you risking your pensions for some to gamble with your money ???
So this is the fiat money version of Terra-Luna stablecoin crisis? I wonder why those cryptos and nfts aren't regulated
Why does it sound like someone is starting another crash movie
Who knew calculus was so dangerous
Sorry, but how on earth income tax cut can spook investors?
You might have to listen again to the video. They do explain it, it's just not the easiest to absorb unless you work in finance (which I don't) and are familiar with their terms and whatknot.
The deficit created by tax reductions, investors (or market participants) believe, will be managed by issuing fresh bonds. As the demand for fresh debt (bonds) is already weak, the value of bonds that are traded in the market saw additional pressure. This triggered a sell-off as investors ran for cover. As bonds got liquidated, derivative contracts opened using leverage received margin calls. As liquidity worsened, the only option was borrowing currency or selling additional bonds. This weakened the pound and created a vicious cycle.
all industries now located in China and SEA... where the money goes ..
how? uk ravaged many countries in continents
So, after October 14, UK pensioners can kick rocks and pound sand.
Central banks buying bonds is the OPPOSITE of what you wanna be doing when there's inflation btw.
literally didn't explain How Derivatives Ravaged the U.K. Bond Market
Is "Derivatives" what they are calling Liz Truss now? Savage.
Russia has crippled UK who claimed that Russia was bankrupt!. Russia has huge assets of oil /gas and minerals and huge Trading partners in East /China!. Lady in Russia who runs Russian Central Bank and rescued Russian economy!. U K is now desperate to save UK economy should drop using Derivatives Maarket!.
derivatives are a dirty thing. it is just like betting, only thing is it is allowed by the govt and it is pictured as very professional thing. The same kind of thing happens in casinos but they are termed as different, as gamblers.
Depend entirely on how you use derivatives. Are you going all in based on a guess, thus betting, or are you hedging your portfolio, so not betting but protecting your income? As long as we don't have these feedback loops in which derivatives played a role I don't see the problem. I think the problem is more nuanced than 'durr those pesky derivatives', Truss as prime minister hasn't helped.
@@rs-dn4ez well we have all these professional terms hedging, portfolio which makes it seem legit. In the end it is betting.
@@krishnaSagar69 The original intention of derivates were, and still is, to manage risk. A farmer can use derivates to ensure a price for their crop which will not lead to them “losing the farm.” Airlines can use derivates to reduce the unexpected volatility in fuel prices. It’s true people also use them to take massive leverage but this isn’t the only use-case.
It requires money to make money. This is the best secret I have ever discovered we don't make money we EARN and MULTIPLY money
How please? I'm a newbie in crypto investment, please can you guide me through on how you made it
how did you do that? I've incurred so much losses trying to trade myself
That's exactly why the whole ponzi scheme is going under...lol
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Derivatives didn't ravage the financial markets. Improper use of the financial products without proper stress tests, and inane financial policies by the British government caused it.
That's a very misleading headline.
Black Wednesday 1992 ravaged UK
This video will be extremely relevant the next week.
Also, beautiful reporter
The ticking time bomb I have feared all my life is now starting to blow up...😂😂😂 Anglo Zionist Empire's demise is imminent..
It has arrived but many just haven’t noticed
@@n.e.g.u.s
The whole western capitalist system is gonna take a huge dump..lol
Monsanto sold me the disease and Merck sold me the bandaid, John Jacob bought both at the laundromat and creams fur a lease to sleep their scattered peas...ants then there's the snowy pus veil turned to another dollar to John Jacobs pale. #msdebtzone
Is John Jacob in the room with you right now?
@@spacetoast7783 of course not, only his byeproducts
Drunk, fat and stupid is no way to go through life son. DO BETTER!!
What
Pension funds taking margin 😂
Derivatives should be illegal, period.
People are so easily persuaded by sensationalism, the fault for the crisis falls mostly on the unwise decision of the uk government. Derivatives main function is to hedge risks, even without them people would be taking excessive risk.
Darn circus and the clowns run the show.
Off topic I know, but: How come so many women in the US have a funny sort "brumming" voice? Is it because they are trying to force their fenale voices to sound deeper in a male dominated environment?
VER NO MOLESTE PROGRE.
QUE NO LO VOY A REPETIR CENSURADO SIEMPRE.
RESULTA YA IMPOSIBLE.
*REPETIRLO TODO IGUAL AQUI MISMO.*
PUES LOS CENSORES ME LO IMPIDEN.
FIN.
GRACIAS.
W.S.J.
THANKS.
GREETINGS.
LIKE.