Where the Risk Went
The Cash Has to Be There This Afternoon
A position can be right, funded and profitable at maturity, and still destroy you on a Wednesday because the cash was due before the payoff was.
12 min155 XP available4 challenges
A leveraged holder of long-dated bonds posts collateral against the position and tops it up whenever prices move against it — in cash, within the day. Duration measures how much value moves per point of yield, so the call is simply the notional times the duration times the move. Nothing about this depends on the position being wrong. It depends only on the position being large, long and leveraged.
Must be raised by selling
£96B
Call minus what is already liquid
- Total margin call
- £156B
notional × duration × yield move
UK liability-driven investment strategies ran around £1 trillion
Years — pension liabilities are very long
30-year gilt yields moved about 1.3pp in days
Reproduce a shortfall of more than £90 billion from a move of 1.3 percentage points
- Try 0% — not yet
- Try 2.5% — not yet
- Reproduce a shortfall of more than £90 billion from a move of 1.3 percentage points — done
Answer to continue.