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5:00LDI and the 2022 Gilt Crisis: When Pension Hedging Nearly Broke the Bond Market
A hedge designed to make pensions safer became the thing that nearly blew up the UK bond market. In four days a "boring" pension strategy forced the Bank of England to start buying gilts to stop a doom loop.
A defined-benefit (DB) pension promises members fixed payments decades into the future. The present value of those promises behaves like a very long bond: when long-dated gilt yields fall, the liabilities balloon. Liability-driven investment (LDI) is the hedge — schemes hold long gilts and interest-rate swaps so that assets and liabilities move together. Done unleveraged it is genuinely prudent. The problem in 2022 was *leverage*.
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