Who lends money to the government, and what was the 2022 gilt crisis?

Governments borrow from many kinds of lender, such as pension funds, insurers and overseas investors. They do it by selling bonds, which are IOUs that promise regular interest and the original sum back on a set date. In the UK these are called gilts. In 2002 about two-thirds of gilts were held by insurance companies and pension funds, and by the second quarter of 2024 overseas investors held around 31 percent. The Bank of England has also bought large amounts since 2009 under quantitative easing.

What buyers demand to lend is called the yield, and it moves with the bond's market price. In September 2022 the UK showed what happens when lenders get nervous. On 23 September the Chancellor, Kwasi Kwarteng, delivered 'The Growth Plan', a mini-budget of tax cuts designed to be paid for by increasing the national debt. Borrowing costs on five-year government bonds then had their largest one-day increase on record as traders sold UK assets.

The sell-off became a danger for pension funds. Many used liability-driven investment derivatives, which forced them to post extra cash as collateral when gilt prices fell. That led to forced selling, which pushed prices down further. On 28 September the Bank of England began temporarily buying bonds because some funds were at risk of collapse, one deputy governor describing some as hours from being wound up.

The Office for Budget Responsibility had not published a forecast. Prime Minister Liz Truss said there was no time to wait, but the OBR said it could have produced one in time. After the prime minister changed on 25 October, gilt yields returned to their earlier levels. The Bank later sold the bonds it bought for more than it paid, a net profit of 3.8 billion pounds.