September 2022·Advanced
In short
In September 2022, the UK government announced large, unfunded tax cuts. Gilt yields spiked, which triggered margin calls across pension funds using leveraged strategies, forcing them to sell gilts into a falling market. The Bank of England had to buy long-dated gilts to break the doom loop.
The government announced big tax cuts funded by borrowing, with no credible plan to pay for them. Investors demanded a higher yield to hold UK debt, so gilt prices fell and yields rose sharply.
The 30-year gilt yield rose by the most on record over a matter of days. Bond prices collapsed. Pension funds that held gilts as collateral were suddenly under water.
Pension funds using Liability-Driven Investing held gilts as collateral against interest-rate swaps. As gilt prices fell, they faced margin calls and had to sell gilts to meet them, pushing prices down further.
The Bank of England stepped in to buy long-dated gilts, providing a buyer of last resort and breaking the forced-selling spiral. Stability returned, but it took time to unwind.
The Prime Minister resigned. LDI funds were forced to hold more collateral and de-lever. The episode is now a standard reference point for systemic risk in supposedly safe pension strategies.
Sales & Trading
Rates desks, the gilt market, and collateral and margin mechanics are the whole story.
Macro
Fiscal-monetary interaction, and how policy mistakes move markets in real time.
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