UK gilt crisis

Financial markets - government debt - UK - 2022.

The UK gilt crisis was a downward spiral in UK treasury bond prices in late September 2022.

It is also known as the UK LDI crisis, because of the role played by pension funds' leveraged LDI investment strategies in amplifying and transmitting the initial problems.

2022 pension fund asset losses estimated at £500 billion

"Things came to a head at the end of September 2022, when the newly established government of Prime Minister Truss revealed a fiscal plan which, among other things, promised extensive tax cuts. The plan also included large aid packages to help households and firms deal with inflation, which would be financed by more than £70 billion of new government debt.

This plan was met with heavy criticism since the government was already dealing with large deficits. Markets also reacted negatively with Sterling depreciating considerably and gilt prices falling sharply. As a result, yields on 30-year bonds rose by 80 basis points between the morning of Friday, 23 September, when the plan was announced, and the following Monday. Market conditions improved marginally early on 27 September, but then quickly deteriorated again before the Bank of England was forced to step in to stabilise the situation.

The increase in gilt yields had a twofold effect on pension funds. Firstly, the increase reduced the present value of their liabilities, improving their positions and funding ratios. On the other hand, the drop in gilt prices deteriorated funds’ asset positions and, more importantly, reduced the value of the collateral used to cover short-term borrowing through repos and derivatives. Fund asset managers were then issued with margin calls and asked their funds for additional capital in response.

However, many funds were slow to respond to these requests, especially the smaller ones with pooled asset management. As a result, managers were forced to sell gilts in order to raise short-term capital, leading to a further deterioration in gilt prices. Had this been allowed to go on, it would likely have set in motion additional margin calls, followed by more gilt sales and so on, before eventually crashing the entire gilt market.

... this fire-sale spiral was only avoided thanks to the intervention of the Bank of England, which committed more than £100 billion to buying long-term gilts between 28 September and 14 October. In response to this intervention, gilt yields fell rapidly, although they then started to increase again until 11 October when the Bank of England was forced to also start buying indexed gilts, which it had historically not done before...

Pension fund losses due to this episode are not clear and may perhaps never be fully determined, although in their testimony before a parliamentary committee, Clacher and Keating (2022) estimate the asset losses to be at least £500 billion."

Pension Funds and Financial Stability: The Case of the UK Gilt Crisis - Gudjonsson & Jensen - 2023.

See also

• Basis point
• Bond vigilante
• Call
• Collateral
• Confidence
• Contagion
• Credit crunch
• Deficit
• Derivative
• eurozone crisis
• Fiscal
• Gilts
• Global Financial Crisis
• Great Depression
• Great Recession
• Index-linked gilt
• LDI fund
• Lehman
• Leverage
• Liability driven investment (LDI)
• Liquidity management
• Margin
• Non-bank financial institution (NBFI)
• Repo
• UK LDI crisis
• Yield

Other resources

• Pension Funds and Financial Stability: The Case of the UK Gilt Crisis - Gudjonsson & Jensen - 2023
• Professor Iain Clacher & Dr Con Keating - written evidence to UK Parliament Work and Pensions Committee for inquiry on Defined benefit pensions with liability driven investments (LDI0018)