Antoine Bouvet, rates strategist at ING, said: “There is a new front in the war against gilt market dislocations: the repo squeeze and short-dated gilt shortage.”
He said: “It is becoming increasingly difficult to buy short-dated gilts, or to borrow them via repurchase agreements (repo).
“The crisis has been brewing for some time due to increased market volatility and investors’ risk aversion, but it worsened when pension funds and other market participants decided to increase their liquidity holdings in anticipation of the September/October gilt crisis.”
Mr Bouvet said the strong demand for the shortest dated bonds in the Bank’s first QT sale reinforces the “impression of a shortage of bonds” in this part of the gilt market.
Bank of England Governor Andrew Bailey admitted on Thursday that traders have highlighted to officials ongoing issues in the market.
Threadneedle Street was forced to buy billions of pounds of 30-year bonds to ease a crisis at pension funds after the mini-Budget market chaos. Liability-driven investment (LDI) funds scrambled to meet huge cash calls to shore up their hedges following the surge in gilt yields.
The International Capital Market Association, which represents the bond market’s biggest traders, warned last month of a scarcity of liquid assets in the eurozone’s repo and money markets.
