We all know the story about why short-end rates have soared in the UK. But what about the long-end? Well, basically pension plans appear to have been caught in doom-loop of margin calls on interest rate derivatives that forced them into dumping longer-maturity UK gilts, and spurred the Bank of England into intervening this week.
When fixed rates rise, the mark-to-market of your long fixed rate swap position falls. And your excess collateral buffer is reduced. It probably needs replenishing at some point. Maybe immediately. Like right now. And if you simply can’t replenish it and triggers are hit, your counterparty might simply liquidate all the collateral you’ve posted and close the position.