Yields on benchmark 10 year government bonds soared to more than 4% this morning as market concern over the chancellor’s Mini Budget on Friday continued.
According to data from Refinitiv IFR Markets, yields on benchmark 10-year gilts rose from 0.974% at the beginning of this year to 2.241% at the end of June and 2.803% at the end of August. This month they had risen to 3.139% at the end of 16 September and 3.495 at the end of 22 September, the day before the chancellor's Mini Budget.
By the close of last Friday, yields had spiked to 3.827 and this morning yields pushed up further - breaching the 4% barrier to stand at 4.137 by 9:30am today.
XPS Pensions chief investment officer Simeon Willis said the "unprecedented" surge in gilt yields this morning on top of those seen on Friday would have improved UK pension scheme funding levels "by a greater quantum than a whole year's deficit removal contributions".
He said: "Market conditions are changing at pace and the factors that influence them stretch far beyond the pensions industry."
But he warned that liability-driven investment (LDI) managers were begining to flag new emergency collateral calls - a trend he said was likely to continue in the coming days.
Willis said: "Agility is key, and schemes should be braced as we move to a new market environment. Without fail, schemes using LDI should review their plans and assess whether further action is required to maintain a diverse portfolio, be ready for any further LDI collateral calls and maintain - or even increase - hedging to lock in these improvements."
Commenting on Friday about the surge in gilt yields following the chancellor's announcement, Barnett Waddingham partner Ian Mills agreed that liabilities would have fallen sharply - noting the gilt market had suffered an "allergic reaction" to the Mini Budget reflecting increasing expected future supply of gilts, combined with fears that the tax cuts will add further fuel to the inflationary fire.
Mills also thought the falls in liabilities could cause significant challenges, especially for schemes with LDI portfolios.
He said: "DB schemes using LDI will come under pressure, especially if the rise in yields is sustained. The rise in gilt yields will likely cause schemes to have to recapitalise hedges - some will be able to do so from cash reserves but others will find they are forced to sell other assets. Some schemes could even be forced to unwind hedges exposing them to the risk of reversals in yields.
"Schemes using LDI should immediately review whether their collateral buffers remain adequate, and consider taking remedial action if not. Waiting to receive a collateral call that you cannot meet is not a good idea."
