Research

UK LDI market disruption – a U.S. plan perspective

Fidelity's Michael Jarasitis, institutional portfolio manager, shares his insights on the recent UK liability-driven investing market disruption and important lessons for LDI plan sponsors in the U.S.

By: Michael Jarasitis
Updated: 10/5/2023
Key Takeaways
  • The UK government intervened with targeted direct asset purchases of gilts (UK government bonds) for the second straight month in October and warned of risks to financial stability following the largest monthly increase in longer-term government bonds yields in decades.
  • Dysfunction in the UK bond market also led to slightly increased volatility for longer term government bonds issued by the U.S. and the euro area in September.
  • Rapidly rising yields led to the forced selling of gilts due to margin calls on liability driven investing (LDI) strategies run by private pension funds that sought to hedge long-term interest-rate risk. This selling centered on pooled LDI products using leverage and/or derivatives.
  • We view the U.S. LDI market as less susceptible to systemic risks related to hedging.
  • That said, we believe using derivatives related to inherently volatile assets, such as long-term bonds, requires specific risk-management techniques for LDI strategies.
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Guarding Against Liquidity Events: What We Can Learn from the UK Gilts Sell-Off
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