Industry Updates

LSE widens spread limit on UK gilts amid thinning liquidity

The exchange widened spread limits for Russia ETFs to 10% in February

Jamie Gordon

London Stock Exchange

The London Stock Exchange (LSE) announced on Wednesday it would widen the maximum spread on UK gilts trading on the order book for retail bonds to five percent as a new round of sell-offs grips UK sovereign debt. 

The change, effective from Thursday 13 October, followed more offloading of UK gilts mid-week as the Bank of England said it would end its emergency gilt-buying programme by the end of the week. 

It comes after a similar move by the exchange earlier this year, when it widened the maximum spread market makers could offer on Russia ETFs to 10% in February, twice as much as it allowed for ETFs during the COVID-19 volatility in March 2020. 

Such moves are intended to encourage market makers, who may be unwilling to take on more risk during unsteady periods for certain asset classes, to continue trading. 

The Bank of England stepped in a fortnight ago with £65bn in bond purchases after Kwasi Kwarteng’s ‘mini budget’ forced pension funds using liability-driven-investment (LDI) strategies to offload their UK gilt exposures to drum up cash to meet margin calls, putting them at risk of insolvency as the price of the assets they were selling continued to fall.  

The policymaker must now decide whether to extend its support past its current deadline on Friday, which will ultimately depend on whether pension funds have been able to shore up their derivative strategies and amass large enough cash reserves over the past two weeks.

In the meantime, today’s move by the LSE to widen spread limits on UK gilt securities comes as investors sell UK sovereign debt in anticipation the Bank of England may not continue its recent round of quantitative easing. 

Peter Sleep, senior portfolio manager at 7IM, told ETF Streamin April: “In 2008 and 2020, we saw the bond markets dry up and I am sure in the next crisis we will see the bond markets dry up again.

“The idea of spreads widening in volatile times is not anything new. Did not the Bank of England look at this a few years ago and find that the wider spreads actually increased the number of market makers entering the market?” 

While spread limit widening tends to only last a day, the LSE said its recent change would remain in place until further notice. 

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