2024
Working Paper
HBS Working Paper Series

Fire Sales of Safe Assets

By: Gabor Pinter, Emil Siriwardane and Danny Walker

Format:Print
| Language:English
| Pages:65

Abstract

We use trade-level data to study price pressure effects in the UK gilt market from September to October 2022. During this period, forced sales by liability-driven investment funds (LDIs) led to price discounts on the order of 10%, accounting for roughly half the total decline in gilt prices. Balance sheet segmentation and operational issues slowed equity injections into LDIs by well-capitalized pension investors, leading LDIs to instead sell gilts. This effect was most pronounced for pooled LDIs, which invest on behalf of multiple pension schemes, because of coordination problems between pensions. Hedge funds also appear to have delayed entry to time the bottom of the fire sale. Overall, our findings illustrate how capital can be slow moving internally, due to contracting frictions, and externally, due to strategic arbitrager behavior.