UK LDI crisis

Financial markets - liability driven investment (LDI) - leverage - pension funds - non-bank financial institutions (NBFIs) - government debt - UK - 2022.

The UK LDI crisis was a downward spiral in UK treasury bond prices in late September 2022, amplified by pension funds' investments in leveraged liability driven investment (LDI) funds.

It is also known as the UK gilt crisis.

Market stress amplified within NBFI sector - liquidity mismatches

"Market stress centered on Liability-Driven Investment (LDI) funds following the UK "mini-budget" announcement in September 2022 again cast a spotlight on vulnerabilities in the non-bank financial institution (NBFI) sector.

The sudden and sharp increase in gilt yields after the “mini-budget” forced defined benefit (DB) pension funds with leveraged LDI strategies to quickly raise a large amount of cash to meet margin and collateral calls, contributing to fire-sales of longer-dated gilts.

The effect was compounded by rising long-term interest rates in the preceding 10 months, to which some pension schemes and LDI funds had failed to adjust their available liquidity resources.

Imminent financial stability risks forced the Bank of England (BoE) to intervene in the gilt market in a temporary and targeted way to restore orderly market conditions while allowing the LDI funds time to recapitalize.

At the core of the turmoil were the leverage, liquidity mismatches between assets and liabilities, and concentrated positions of the LDI strategies.

Over the past several years there were several instances where similar risk factors triggered market stress to either originate in the NBFI sector or be amplified within the NBFI sector."

Putting Out the NBFire: Lessons from the UK’s Liability-Driven Investment (LDI) Crisis - IMF working paper - Prepared by Ruo Chen and Esti Kemp - September 2023.

See also

• Call
• Collateral
• Concentration
• Confidence
• Contagion
• Deficit
• Derivative
• eurozone crisis
• Financial stability
• Fire sale
• Fiscal
• Gilts
• Global Financial Crisis
• International Monetary Fund (IMF)
• LDI fund
• Leverage
• Liability driven investment (LDI)
• Liquidity
• Liquidity management
• Margin
• Non-bank financial institution (NBFI)
• Recapitalise
• Repo
• UK gilt crisis
• Yield

Other resources

• Putting Out the NBFire: Lessons from the UK’s Liability-Driven Investment (LDI) Crisis - IMF working paper - Prepared by Ruo Chen and Esti Kemp - September 2023
• 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)