Irish-Resident LDI Funds and the 2022 Gilt Market Crisis

Peter Dunne, Angelica Ghiselli, Frederik Ledoux and Barra McCarthy
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Angelica Ghiselli: Central Bank of Ireland
Frederik Ledoux: Central Bank of Ireland
Barra McCarthy: Central Bank of Ireland

No 7/FS/23, Financial Stability Notes from Central Bank of Ireland

Abstract: Over September-October 2022, the UK government bond (gilt) market experienced a severe disruption, as selling pressures amplified yield increases. At the centre of this dynamic were liability driven investment (LDI) funds, a product designed to manage interest rate and inflation risk for defined benefit UK pension funds. This Note details how sterling (GBP) denominated Irish-resident LDI funds, which have a significant footprint in the gilt market, were affected by, and contributed to, gilt market disruption over the period. Funds saw substantial declines in the value of their assets, which – in the presence of substantial leverage – posed a significant risk to funds’ survival. Due to their use of leverage, funds faced modest demands for cash from margin calls, while collateral calls that could be met with securities were more substantial. Gilt sales by Irish-resident funds accounted for 30 per cent (£11 billion) of net sales by all LDI entities over the crisis period, but these funds raised more cash from investor subscriptions than gilt sales. LDI fund resilience has improved since the crisis, supported by supervisory interventions by the Central Bank of Ireland and other European authorities.

Date: 2023-09
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