Market blames government for UK gilt plunge

Yields on benchmark index-linked stocks such as the 2% 2035 index-linked gilt and the 1.25% 2055 index-linked gilt have been falling steadily for the past few months, but yesterday's drop was almost unprecedented. 2% 2035 linked gilt yields fell from 0.81% to 0.7% on 17 January, and other gilts suffered similar drops.

The fall in yields will harm pension funds, which calculate their liabilities from the real yields on matching assets - a fall in yields means a rise in liabilities. Because funds tend to measure their liabilities monthly or quarterly rather than daily, the full extent of the problem is not yet clear. But it has been estimated at £28 billion by Aon Insurance.

Donald Duval, Aon Consulting's chief actuary, blamed a change in pension accounting rules that had compelled company pension funds to cover their inflation liabilities by buying index-linked stock: "There just isn't enough stock available to go round. Unless the Government issues a huge amount of index-linked stock, this kind of market instability is likely to persist for several years."

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