By Jack Barnett
Former prime minister Liz Truss has today admitted her calamitous mini-budget could have scaled back had she known about the existence of LDIs.
Truss admitted in an interview with Spectator TV that she “didn’t know the existence” of LDIs – liability driven investments – that have a combined value of around two thirds of UK GDP.
The South West Norfolk MP and former foreign secretary sent shockwaves through financial institutions last September, when her £45bn in unfunded tax cuts set markets wobbling.
Sterling sank to its lowest level on record against the US dollar and UK debt levels hit their highest rates in two decades.
Truss, who beat Rishi Sunak in the race to succeed Boris Johnson as Conservative leader, was ousted from office on the 50th day of her premiership – and replaced by Sunak.
She revealed in an interview with the Sunday Telegraph yesterday that her leadership campaign was “brutal” and marred by “friendly fire”.
And now in an interview with Spectator TV, Truss today said: “The key thing we didn’t know about was the LDI issue… what I’ve subsequently discovered is the problems in the bond market preceded the mini-Budget.”
Truss said she would “have done things differently” in the mini budget if the Bank of England told her and then chancellor Kwasi Kwarteng about the fragility in a small section of the pension market.
After she announced her £45bn of unfunded tax cuts, investors ditched bonds rapidly, a sign of them demanding a higher rate of return to park their cash in the UK.
This forced bond prices sharply lower, sending yields up rapidly. The pair move inversely.
As a result, pensions that use liability driven investment, or “LDIs”, vehicles to maximize returns, faced a wave of calls from lenders to stump up more cash to cover losses.
That sparked a near fire sale in the pension market that pushed government bond yields to their highest level in more than two decades.
“What we didn’t understand is the fragility caused by these liability-driven investments – and essentially what it meant was that small movements or rapid movements in the market could result in cash calls happening and essentially a chain reaction,” Truss said.
She conceded there “should have been better communication” between her, the chancellor and Bank of England governor in the run up to the mini budget on 23 September.
The Bank will meet with treasury officials well ahead of a budget so rate setters can get a sense of the shape of future fiscal policy.
Bailey has since said communication was pretty thin between Number 10, the treasury and the Bank.
Now chancellor Jeremy Hunt scrapped pretty much everything Truss signed off on and launched £55bn of tax hikes and spending cuts on 17 November. Yields on UK bonds are now trading around 3.5 per cent despite the Bank sending official interest rates to four per cent last week.
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