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.

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