UK gilt ETFs ‘no-brainer’ a year on from LDI crisis

The Bank of England taking a more dovish tone after 14 consecutive hikes has put UK sovereigns back in focus for asset allocators

Jamie Gordon

Big Ben London UK

A year on from turmoil in UK pension schemes and comparisons of UK gilts to emerging markets, the asset class is now in the sights of fund selectors anticipating an end to Bank of England (BoE) interest rate hikes.

Last September, 40-day Chancellor Kwasi Kwarteng’s ‘mini-budget’ or ‘fiscal event’ pulled the rug out from defined benefit pension schemes using liability-driven investments (LDIs) by plotting the largest package of unfunded tax cuts in five decades, sending 30-year UK gilt yields to two-decade-highs.

With most LDI schemes relying on derivatives to capture up to seven-times leveraged exposure to UK gilts, the rapid boom in bond yields and cut to valuations sparked a three-pronged ‘doom loop’, whereby the value of the schemes’ derivative positions fell, as well as the often gilt-based collateral posted against them, forcing pension funds to top up their collateral – often by selling their liquid positions, gilts – to meet margin calls...

This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.


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