Dutch central bank is calling on the country’s pension funds to boost holdings of cash and other liquid assets and to report any need for fire sales of assets, to ensure that they can avoid the turmoil that hit the UK, where pension schemes rushed to sell assets in response to a drop in government debt prices that sparked collateral calls in hedging strategies.

Sterling money market funds, which act as bank accounts for institutional investors, have gathered £53bn in just a fortnight as UK pension schemes rush to build liquidity defences against market volatility before the Bank of England’s emergency bond-buying programme ends. Managers of these funds anticipate large withdrawals related to LDI collateral calls.

The liquidity crisis of the UK gilts markets has put at risk the government initiative to use pension funds to drive economic the transition to a low-carbon economy. The UK approved a new type “long-term asset fund” for investments in illiquid assets from investors such as pension funds, but their capacity to be buyers of illiquid assets has now taken a blow.

A rush for cash by UK pension funds has weakened the UK corporate debt market and pushed up borrowing costs for companies. In future, businesses like Rolls-Royce could borrow in international markets, which would weaken trading in the sterling market further. The UK corporate debt market is already small compared with Europe’s.

LDI is superbly complex so no one understands it, with tricky collateral management and an orchestra of instruments from gilt total return swaps to gilt repo and inflation swaps. But within the British pension fund community, sceptics have largely been the exception and LDI has become widely adopted by most of the UK’s 5,200 defined-benefit pension plans.

UK’s 5,200 defined benefit schemes use derivatives to hedge against moves in interest rates and inflation, which require cash collateral to be added depending on market moves. The sharp fall in the price of 30-year government bonds led to unprecedented demands for more cash. To raise the funds, pension funds sold assets, causing prices to fall further.

The UK’s green bond sale has already pulled in more than £24 billion of orders. The green bond last year drew a much heftier £74 billion orderbook. Yet bondholders have taken fright. 30-year bond yields are soaring above 5%. Green bonds pull in demand from specialist ethical funds. Yet this time the outlook for the UK will dominate investor thinking.

BoE has launched a temporary bond-buying programme to prevent "material risk" to UK financial stability, which could have resulted in the collapse of a swathe of pension funds. BoE will buy as many long-dated government bonds as needed to stabilise financial markets. This news had an immediate impact on the interest rates of UK government debt.

Total outflows from European stock funds in the past six months have reached $83 bln. Investors have been steadily accumulating short positions on German bunds as yields hover near the highest level in a decade. The outflows from European-focused ETFs are the biggest in at least 15 years, while global stock funds have added $166 billion this year.

Dutch pension funds sold €88 billion worth of assets in the first half of 2022. They used part of the proceeds to meet the margin requirements under derivatives contracts, which had risen due to increased interest rates. Dutch pension funds sold a large proportion of their equities and money market fund stakes, while increasing the share of bonds.

Rapid interest-rate hikes deployed by policy makers have brought to an end a four-decade bull market in bonds. That’s creating a difficult environment for investors, with bonds and stocks sinking in tandem. MSCI's Index of global stocks has slumped 19% this year. Fixed-income investors are showing plenty of demand for government bonds as yields rise.

The share of green and sustainable bonds rose from 2% of all bonds globally in 2018 to 12% at the end of 2021, but investors have become less willing to pay the premium. They have wised up to bogus environmental claims, or so-called greenwashing. But the outflows from ESG bond funds in 2022 have been much lower than outflows from other bond funds.