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 Gilt Yields, June 2022 – May 2023 GBP against USD over the last 50 years.

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