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

quick take

  • In October last year, British Prime Minister Liz Truss introduced the following “mini-budget”: triggered Pension fund crisis. This mini-budget episode shocked the UK market, with the pound rising to 1.11 against the US dollar.
  • In the wake of new inflation figures UK government yields rose further yesterday.
  • Pension funds fell as yields spiked across the curve, especially at the long end (30 years).
  • according to bloombergPension funds use leverage to balance assets and liabilities.
  • Pension funds allocate so much to long-term, highly leveraged bonds that they need to post collateral to avoid being called on margin if bond prices fall.
  • As gold (government bond) prices continued to fall, the threat of margin calls loomed, forcing pensioners to seek immediate financing.
  • According to the chart below, yields are approaching October peak levels across the curve, a reminder of last year’s debacle.
  • This development is important not only for the UK market but also for the global market as US Treasury yields may follow suit. This will therefore have a direct impact on US interest rates.
UK yields, June 2022 – May 2023
GBPUSD: (Source: TV)
GBP vs USD over the last 50 years.

UK yields surged to levels reflecting last year’s pension crisis, first published on CryptoSlate.

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