UK yields skyrocket to levels echoing last year’s pension crisis

Quick Take

  • Last October, U.K. Prime Minister Liz Truss introduced a “mini-budget” that triggered a pension fund crisis. The mini-budget episode sent shock waves around the UK markets and the GBP to 1.11 against USD.
  • In the wake of new inflation numbers yesterday, U.K. government yields have soared even higher.
  • As yields soared across the curve—especially at the long end (30 years)—pension funds went downward.
  • According to Bloomberg, pension funds use leverage to balance assets with liabilities.
  • Pension funds have a significant allocation towards long-end bonds that are highly levered, so when the price of the bond drops, they need to post collateral not to be margin called.
  • As gilt (government bond) prices continued to drop, pension providers were forced to raise cash imminently as the threat of margin call loomed.
  • Per the chart below, yields are nearing October’s peak levels across the entire curve, reminiscent of last year’s fiasco.
  • This development is significant not only for the UK market but also for global markets, as U.S. Treasury yields can follow suit. Consequently, this would have a direct effect on interest rates in the United States.
UK Yields: (Source: TV)
UK Gilt Yields, June 2022 – May 2023
GBPUSD: (Source: TV)
GBP against USD over the last 50 years.

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