In September and October 2022, the UK gilt market experienced one of its most violent dislocations in decades. The trigger was the Truss government's 'mini-budget' of 23 September 2022, which announced unfunded tax cuts of a scale that shocked markets. Gilt yields rose sharply and rapidly — movements that in normal conditions would take months were compressed into days.

Why pension funds were at the centre

For over a decade, UK defined benefit pension schemes had pursued Liability-Driven Investment (LDI) strategies. LDI uses interest rate derivatives — principally long-dated interest rate swaps and gilt-linked repo — to hedge the interest rate sensitivity of pension liabilities. Because liabilities are long-dated (pension payments stretch decades into the future), they are extremely sensitive to long-term interest rates.

To lever up their rate hedging beyond what their physical gilt holdings alone could support, many pension funds used leverage through repo and derivatives. This leverage was the source of their vulnerability.

The collateral spiral

When gilt yields rose sharply, the long-dated derivatives used for LDI hedging fell in value. Falling values triggered margin calls from LCH SwapClear and bilateral counterparties. Pension funds had to post collateral — but their liquid assets were often already deployed. To raise cash quickly, funds began selling gilts. But many funds selling simultaneously pushed gilt prices down further, which raised yields further, which triggered more margin calls — a self-reinforcing spiral.

The Bank of England intervention

On 28 September 2022, the Bank of England announced an emergency gilt purchase programme — buying long-dated gilts in the open market to stabilise prices and break the spiral. The intervention worked: yields fell, margin calls eased, and the immediate crisis passed. The Bank's purchases were temporary and wound down over the following weeks.

The 2022 LDI crisis produced lasting changes to how pension funds manage liquidity buffers, how leverage in LDI strategies is structured, and how regulators think about the systemic risk embedded in large, concentrated derivatives positions. The full operational, regulatory, and market mechanics of the crisis are examined in Market Mechanics — the complete plain-English guide to how a bank's markets business works.