The UK gilt curve: is it actually steep today?

18 May 2021
Computer screen showing graph of improvement over time

As you know, we keep a close eye on movements in UK yield curves to assess the impact on our clients liability valuations and the implications for LDI portfolios. Over Q1, we saw long-dated yields rise materially, while short-dated yields remained low. This movement has pushed down the value placed on UK pension scheme liabilities, but has squeezed liquidity as LDI portfolios have needed to recapitalise with rising rates.

There has been lots in the financial press over recent months on this ‘steepening’ of the UK yield curve and what this might mean. A question we had was: “is the UK gilt curve actually steep today and what should we be thinking about for our clients’ hedging portfolios?”.

To help answer this question, we decided to look back at the 30 years to get some context. In particular, we were keen to think about the potential for short-term movement upwards (further steepening) and downward (through further rate cuts or a slower than anticipated recovery out of the COVID pandemic), and then see if there was anything else we could learn.

Take a look at our 2 minute video

In summary, what we took from the analysis was:

There is clear scope for yields to rise or fall materially from current levels over the short-term. Over the longer term, this movement could be extreme given historical positioning. We continue to recommend that all our clients review their hedging strategy and the underlying collateral arrangements on a regular basis.