Clearly you know your onions Michael! Much of the discussion of the bond market by media, think tanks, and politicians ignores or fudges the existence of two markets – primary and secondary. They think of the secondary market players as investors in government debt, thereby being essential to the funding of government spending.
In that mode of thinking, we can say that significant breaches of the full funding rule occur given the extended periods of QE where the Bank buys back bonds from the "investors".
This is not the case as far as the DMO is concerned. It continues to meet its obligations, but reserves are returned to the "investors" regardless of the claim that the Bank is independent.
The assertion that the Bank of England caused the 2022 Liability-Driven Investment (LDI) crisis by initiating quantitative tightening (QT) contains a grain of truth about the timing, but it gets the causal direction entirely backwards. In fact, it was the LDI crisis that forced the Bank to postpone its planned active QT, not the other way around.
The Monetary Policy Committee (MPC) had indeed signalled its intention to commence active gilt sales. A vote at the September 2022 meeting was expected to give the final go-ahead for a sales programme of around £10 billion per quarter. However, immediately after the disastrous “mini-budget” announcement on 23 September 2022, the market went into a tailspin.
LDI funds were hit by massive margin calls, triggering a fire-sale of gilts that drove yields even higher. In response, the Bank of England was forced to announce a temporary and targeted gilt-buying programme on 28 September to halt the spiral - the opposite of QT.
Crucially, the MPC’s planned active gilt sales were postponed. As the House of Commons Treasury Committee report explicitly noted: “The launch of active QT was originally planned for October 2022, but was postponed amid the outbreak of the financial crisis related to the liability-driven investment strategies of defined-benefit pension funds.” The Bank confirmed this delay on 18 October, pushing the first gilt sale operation to 1 November.
So, did QT cause the crisis? No. The causality runs backwards.
The crisis was triggered by the fiscal shock of the mini-budget, which caused a sharp, unexpected rise in yields. This, in turn, exposed the fragile, highly leveraged structure of LDI funds, which were heavily reliant on repo funding and derivatives. Bank of England "Underground" research found that LDI selling accounted for roughly half of the decline in gilt prices during this period, with the fiscal policy shock accounting for the other half.
Even passive QT (letting bonds mature without reinvestment) was a gradual process. It began in February 2022—eight months before the crisis - when the Bank Rate reached 0.5%. The stock of QE gilts had peaked at £875 billion and had already fallen to £838 billion by September 2022. This slow unwind was not the driver of the spike. The spike was a classic “duration shock”: a sudden repricing of risk that turned LDI hedges into crushing liabilities. As the Financial Times noted, the Bank’s emergency bond purchases were aimed at preventing a self-reinforcing price spiral triggered by these private-sector vulnerabilities.
The Bank of England does bear some responsibility, but not for the reason often claimed:
Regulatory myopia: The Financial Policy Committee (FPC) had been warned for years about the systemic risks building in the LDI sector but had not taken sufficiently robust action to force funds to hold adequate liquidity buffers. The Bank was monitoring the market, but it was wholly unprepared for a shock of this magnitude.
Communication failures: While the MPC had signalled QT, the market had not fully priced in the risk that a sharp rise in yields would trigger an LDI meltdown. The Bank’s own market intelligence failed to map the fragility of the repo chain.
The “active QT” signalling effect: Although active sales did not begin until after the crisis, the mere announcement that the Bank intended to sell gilts likely contributed to market nervousness in late summer 2022. Markets react to policy intentions as much as actions. Some analysts argue this forward guidance added to the volatility, though the scale of this effect remains debated.
From an MMT perspective, the narrative that the UK government was facing a "solvency" or "funding" crisis is a category error. As Stephanie Kelton frequently reminds us, a currency-sovereign nation cannot run out of its own money; the idea that it can is the economic equivalent of worrying a scoreboard will run out of points.
The mini-budget’s unfunded tax cuts represented a fiscal expansion. The market’s panicked reaction was a classic projection of household-budget logic onto a sovereign issuer. The resulting yield spike was not a signal that the UK couldn't afford its debt; it was a liquidity and valuation crisis for private pension funds.
Macroeconomic policy should be judged by its ability to deliver full employment and price stability, not by arbitrary deficit or debt targets. By allowing the gilt market to whip around based on private leverage, the Bank was effectively letting the tail wag the dog.
Warren Mosler and Bill Mitchell have long argued that the central bank, as the monopoly issuer of the currency, has the ultimate power to set yields and provide liquidity. The Bank’s emergency expansion of the Asset Purchase Facility (APF) in late September perfectly validated this: when the financial system seized up, the state stepped in as the buyer of last resort, proving that solvency was never the constraint. The true policy failure was not the timing of QT, but the prior decision to allow a fragile, leveraged private financial architecture to dictate the terms of public fiscal space, thereby holding real-economy outcomes (like NHS funding or public investment) hostage to the margin calls of pension fund managers.
The LDI crisis was caused by the mini-budget’s fiscal shock, violently amplified by the leveraged structure of LDI funds. The Bank of England responded by postponing its active QT sales and becoming a buyer of last resort.
While the Bank shares blame for inadequate regulatory oversight and poor market communication, the assertion that “the BoE caused the crisis by initiating QT just before the mini-budget” gets the direction of causality backwards. The crisis caused the Bank to delay QT; QT did not cause the crisis.
Clearly you know your onions Michael! Much of the discussion of the bond market by media, think tanks, and politicians ignores or fudges the existence of two markets – primary and secondary. They think of the secondary market players as investors in government debt, thereby being essential to the funding of government spending.
In that mode of thinking, we can say that significant breaches of the full funding rule occur given the extended periods of QE where the Bank buys back bonds from the "investors".
This is not the case as far as the DMO is concerned. It continues to meet its obligations, but reserves are returned to the "investors" regardless of the claim that the Bank is independent.
Is that a fair argument?
The assertion that the Bank of England caused the 2022 Liability-Driven Investment (LDI) crisis by initiating quantitative tightening (QT) contains a grain of truth about the timing, but it gets the causal direction entirely backwards. In fact, it was the LDI crisis that forced the Bank to postpone its planned active QT, not the other way around.
The Monetary Policy Committee (MPC) had indeed signalled its intention to commence active gilt sales. A vote at the September 2022 meeting was expected to give the final go-ahead for a sales programme of around £10 billion per quarter. However, immediately after the disastrous “mini-budget” announcement on 23 September 2022, the market went into a tailspin.
LDI funds were hit by massive margin calls, triggering a fire-sale of gilts that drove yields even higher. In response, the Bank of England was forced to announce a temporary and targeted gilt-buying programme on 28 September to halt the spiral - the opposite of QT.
Crucially, the MPC’s planned active gilt sales were postponed. As the House of Commons Treasury Committee report explicitly noted: “The launch of active QT was originally planned for October 2022, but was postponed amid the outbreak of the financial crisis related to the liability-driven investment strategies of defined-benefit pension funds.” The Bank confirmed this delay on 18 October, pushing the first gilt sale operation to 1 November.
So, did QT cause the crisis? No. The causality runs backwards.
The crisis was triggered by the fiscal shock of the mini-budget, which caused a sharp, unexpected rise in yields. This, in turn, exposed the fragile, highly leveraged structure of LDI funds, which were heavily reliant on repo funding and derivatives. Bank of England "Underground" research found that LDI selling accounted for roughly half of the decline in gilt prices during this period, with the fiscal policy shock accounting for the other half.
Even passive QT (letting bonds mature without reinvestment) was a gradual process. It began in February 2022—eight months before the crisis - when the Bank Rate reached 0.5%. The stock of QE gilts had peaked at £875 billion and had already fallen to £838 billion by September 2022. This slow unwind was not the driver of the spike. The spike was a classic “duration shock”: a sudden repricing of risk that turned LDI hedges into crushing liabilities. As the Financial Times noted, the Bank’s emergency bond purchases were aimed at preventing a self-reinforcing price spiral triggered by these private-sector vulnerabilities.
The Bank of England does bear some responsibility, but not for the reason often claimed:
Regulatory myopia: The Financial Policy Committee (FPC) had been warned for years about the systemic risks building in the LDI sector but had not taken sufficiently robust action to force funds to hold adequate liquidity buffers. The Bank was monitoring the market, but it was wholly unprepared for a shock of this magnitude.
Communication failures: While the MPC had signalled QT, the market had not fully priced in the risk that a sharp rise in yields would trigger an LDI meltdown. The Bank’s own market intelligence failed to map the fragility of the repo chain.
The “active QT” signalling effect: Although active sales did not begin until after the crisis, the mere announcement that the Bank intended to sell gilts likely contributed to market nervousness in late summer 2022. Markets react to policy intentions as much as actions. Some analysts argue this forward guidance added to the volatility, though the scale of this effect remains debated.
From an MMT perspective, the narrative that the UK government was facing a "solvency" or "funding" crisis is a category error. As Stephanie Kelton frequently reminds us, a currency-sovereign nation cannot run out of its own money; the idea that it can is the economic equivalent of worrying a scoreboard will run out of points.
The mini-budget’s unfunded tax cuts represented a fiscal expansion. The market’s panicked reaction was a classic projection of household-budget logic onto a sovereign issuer. The resulting yield spike was not a signal that the UK couldn't afford its debt; it was a liquidity and valuation crisis for private pension funds.
Macroeconomic policy should be judged by its ability to deliver full employment and price stability, not by arbitrary deficit or debt targets. By allowing the gilt market to whip around based on private leverage, the Bank was effectively letting the tail wag the dog.
Warren Mosler and Bill Mitchell have long argued that the central bank, as the monopoly issuer of the currency, has the ultimate power to set yields and provide liquidity. The Bank’s emergency expansion of the Asset Purchase Facility (APF) in late September perfectly validated this: when the financial system seized up, the state stepped in as the buyer of last resort, proving that solvency was never the constraint. The true policy failure was not the timing of QT, but the prior decision to allow a fragile, leveraged private financial architecture to dictate the terms of public fiscal space, thereby holding real-economy outcomes (like NHS funding or public investment) hostage to the margin calls of pension fund managers.
The LDI crisis was caused by the mini-budget’s fiscal shock, violently amplified by the leveraged structure of LDI funds. The Bank of England responded by postponing its active QT sales and becoming a buyer of last resort.
While the Bank shares blame for inadequate regulatory oversight and poor market communication, the assertion that “the BoE caused the crisis by initiating QT just before the mini-budget” gets the direction of causality backwards. The crisis caused the Bank to delay QT; QT did not cause the crisis.