A year on from the 'doom loop', UK gilts look a lot less stressed

KWASI Kwarteng hoped his "Growth Plan" announcement last September when he was chancellor would be remembered as a bold and imaginative programme to kick-start the UK's economic potential. Unfortunately, the now notorious "mini-budget" of unfunded tax cuts, without any independent oversight or medium-term economic forecasts, is better known for precipitating the "LDI (liability-driven investment) crisis", which broke the 328-year-old UK government bond or gilts market.

- Anthony O'Brien

As Kwarteng sat down after his statement in Parliament, the prices of those gilts plummeted, breaking records for daily increases in yields.

Higher yields are usually good news for pension schemes from a funding perspective. However, the unprecedented speed and scale of the sell-off was ruinous for many Defined Benefit schemes with "leveraged LDI" in place.

Such schemes had to post "collateral" to meet counterparty margin calls as yields rose. With markets experiencing extreme levels of stress after the "minibudget", schemes turned to the gilt market to sell assets as the only source of liquidity, in order to raise the cash to provide as collateral. Such selling meant yields rose further, sparking the need to post even more collateral, which required additional gilt sales.

As this "doom loop" perpetuated, the Bank of England had to intervene in the gilt market a year ago tomorrow acting as a circuit-breaker. It offered to buy £65 billion of gilts, pushing yields back down to "pre-mini-budget" levels.