One of the bizarre features of the Pension fund led collapse of government bonds prices after the Truss budget was how little many involved in pension fund investing seemed to understand about the way bonds changed in price. For some years when interest rates were artificially depressed by massive official bond buying with newly created money called Quantitative easing, many pension regulators, experts and commentators piled Trustees into UK government bonds as “safe assets” or “matching assets”. They so believed in them they told them to buy many more bonds than they could afford. They put claims on bonds into heavily leveraged funds or LDI funds so the pension fund could own several times what it could afford and only have to pay a small proportion of the cost. The small print said they had to pay up more if the bonds fell in value, but the assumption was the bonds were “safe” and would not tumble.
What they should have known and more importantly should have set out clearly was a government fixed income bond will fall a lot if interest rates go up. The longer the time before the bond repays, the bigger the fall will be. A simplified sum shows why. A bond issues at say £100 and states what the interest will be each year. A 1% bond means the government will pay 1% or £1 on your £100 bond every year until repayment, which is stated as a maturity date. If you lend the government £100 at 1% for a year and rates then go up to 2% the bond will fall in price if you want to sell to £99. The new buyer wants not only the £1 of interest for the year he will own it, but the £1 capital gain he will get when it repays at the original £100 issue value. That then gives him the 2% the market now wants. If you lend the government £100 at 1% with no repayment date, and rates go to 2%, then the value of the bond halves to only £50, as the new buyer wants the £1 of income on the bond to be 2% not 1% of what he invests. The very long dated bonds perform more like the no repayment date bond for obvious reasons.
So many funds bought gilts, UK bonds, at interest rates of around 1%. Look at some of them now. Anyone who lent to the government for 0.5% until 2061 has a bond worth £26.62 today for each £100 of stock . Anyone who lent at 0.875% until 2046 has a bond worth £47.20 today per £100 of stock. Far from being safe and reliable investments these bonds proved to be very volatile and have so far lost their owners more than half their money. Of course if they hold to redemption they will get back the full capital lent, but they will have suffered from a very low interest rate over the whole time of their ownership when deposit rates are now so much higher for less risk and more convenience. Owning a bond that repays in 36 years time means a long wait to get all the initial advance back and a long period of very low returns. It is difficult to see how such an investment matches the liabilities of pension funds, seeking to pay a pension that people would like to go up with prices rather than eroding value as inflation hits.
This is important background for the government as it asks itself if UK pension funds should invest more in the UK, and if they should invest more in shares than in bonds. You can of course more than halve your money by buying the wrong mix of shares at the wrong time just as with long bonds. In good years you tend to make more in shares, as the successful companies which tend to dominate the index grow their profits, earnings and dividends by more than inflation. A matching asset for a pension fund is an asset which over time earns a return that takes care of wage inflation.
October 31, 2025
I remember when I left the Royal Navy in 1989 several of our lectures in the Resettlement Course were on financial investing including bonds. Government bonds were declared as the safest possible investment. It was the same on the financial segments of post graduate business studies. I got the same advice from every financial adviser since then in both UK and Australia, where I now live – except for my current financial adviser of the last ten years or so. Financial advisers who know their stuff are rare. I suggest the probelm is threefold:
1) very few are truly independent.
2) they are subject to government regulation written by people who are subject to safety first type of group think, have little understanding of risk and how it can be managed.
3) Financial advsers themselves demand government regulations that ensure their own avoidance of liability for their advice being of poor quality.
October 31, 2025
Financial advisors who know their stuff and are honest about it are even rarer! They too are also tied up in endless red tape.
October 31, 2025
As C Booker put it (in his group think book I think) red tape in the UK is very often “a sledge hammer to miss the nut”.
October 31, 2025
It becomes “Anarcho-tyranny” :- a political term, coined by the American paleoconservative writer and journalist Samuel Francis in the 1990s, which describes a system of government which combines oppressive power against law-abiding citizens with an inability or unwillingness to enforce basic protective laws against actual criminals.
As Reeves is finding out.
But my sympathy for her is limited. She cheered on these dire laws in her area of Leeds. Anyway her doom loop economic agenda (plus rip off energy and ever more red tape in employment, property letting, private schools etc,) is truly evil and hugely damaging.
But then in mitigation:- She recalls how, when she was eight years old, her father, Graham, pointed out the then Labour Party leader Neil Kinnock on the television and “told us that was who we voted for”. Reeves says she and her sister have “both known we were Labour since then” She joined the Labour Party at the age of sixteen. It this a form of child abuse or religiios indoctrination of 8 year old’s?
October 31, 2025
Does she have a mortgage and have they agreed to switch this to a more expensive buy to let one. Or did she overlook that too?
November 1, 2025
Barrister Steven Barratt has just posted a video in which he distinguishes between chaotic and lawful on one axis and good and evil on another. Boris was chaotic and good. Starmer’s Gang are mostly Fabians and therefore evil and lawful. Starmer’s Gang legalises evil and outlaws good.
October 31, 2025
Financial advisors fall into the same category as Astrologists. Basically they are gamblers using other peoples money. One thing is sure, no matter how bad the investment is doing the adviser takes his commission.
I am quite capable of losing my own money without professional help
October 31, 2025
A few dart thrown at some share listing usually gives rather better performing selections and without the management fees!
October 31, 2025
Are government bonds safe? They are indeed the safest of investments in the sense that the borrower is a better repayment risk than any other organisation. The issue, as noted, is not understanding the maths and the way interest rates CAN move. I recall when I was delighted to borrow at 10% p.a. for a house loan. We do not do enough analysis.
The issue today is, can central banks influence long term interest rates, ie bring down the cost of borrowing for a fixed 5 year loan for a house purchase. The base rate is for short term borrowing, set by the BoE. Bond rates are set by the markets and based on expected inflation rates, money supply, exchange rates and confidence in national economic management. Now, who here thinks this government is competent to manage these issues?
October 31, 2025
@Peter Gardner – it is time for us all to reflect on why Warren Buffett(70, 30 rule) keeps getting it right. However, your 3 points do point to the flaws of advisors. They now have the credibility as price match sites, which are not neutral and mainly owned by the very companies listed on the sites.
I am reminded of the legislation that set out to limit the commissions advisors could receive, my thought then and now is someone get 5% and only makes me 6% any better than someone that charges 10% to you earn you 30%.
The World has moved on in that ‘tracker'(essential a computer trading) is working as most would hope for them rather than specifics.
As always it should be ‘buyer beware’
October 31, 2025
Indeed all obvious stuff or shoud be obvious to numerate people.
But investing in anything in the UK can be very risky as governments so often move the goal posts. As with Osborne’s appalling attacks on landlords, the landlord licensing lunacy that Reeves is in trouble with, her appalling IHT mugging of farmers and small businesses, the loss of the personal allowances, the many changes to pension rules and caps, the changes to CGT indexation, stamp duty and endless other red tape . Like playing chess against the government but the government can and do keep changing the rules.
Pressure is brought by governments to encourage pension and annuity providers to invest is dodgy investments that suits the government’s mad ideas.
I asked Google if any UK regulations actuallyvenforced this and it said:- “No, the UK government does not currently force pension and annuity funds to invest in government bonds, but it is planning to introduce a “reserve power” that would allow it to mandate investment in UK assets, such as private markets, if voluntary commitments are not met. Currently, the government is using incentives, like tax relief, and voluntary agreements, like the Mansion House Accord, to encourage more domestic investment from these funds, reports pensionsandsavings.com.
So it is not your house due to landlord licensing and it is not you pension fund as they might in future force you to invest in government debt or Zealot nutter Ed Miliband’s renewables!
October 31, 2025
As I have said before all the UK taxes combined (income, NI (both) CGT, IHT, VAT can easily take 90% of your investment off you over say 20 years. Often you might do well to get say 10% pretax but end up with perhaps just 5% post tax.
£1M grows to £6.7 in 20 years at 10% if untaxed (in say Monaco or similar) but if taxed at UK rates it only growsc to more like £2.67M – hardly any return at all after inflation. Plus then (on death) you might lose 40% taking it to £1.6m negative in real terms and this is if you do well at 10% gross for 20 years.
Oh and on top of the taxes we have the motorist muggings, landlord mugging, red trap strangling, licencing, compliance costs, energy at 4 times what should be due to Ed’s climate religion, high crime rates, IPT taxes at 14%, poor schools, poor healthcare and four more years of insane socialism.
October 31, 2025
Keep a lump of gold or gold coins (especially if secretly) perhaps buried in the garden might well be a better bet than running a business or investing in the Uk for 20 years and a lot less hassle. It should at least keep pace with inflation. Save the World Gordon Brown sold much of the UKs gold around 25 years back at average selling price around $275 per ounce now worth circa $4,000. An 11% pre tax return for 25 years.
October 31, 2025
Sir John,
It is true to say that, “lending to government can be expensive for investors,” but, I would say, just having a government is expensive for everyone.
October 31, 2025
You government is the most expensive thing you will buy in your lifetime.
October 31, 2025
And the expense that will usually deliver the least value in return. They will perhaps give the people some things but not the things you really want. Things like net harm lockdowns, HS2, duff rationed healthcare, net harm covid “vaccines”, student loans for usually worthless degrees, road blocking, free OAP bus passes, two tier no deterrent policing, legal aid and hotels for illegal migrants, benefits for the healthy but lazy, landlord licensing laws, bus lanes, 20mph speed muggings …
October 31, 2025
The less people lend to governments the less Gov. can waste or do active damage with. It is thus also your duty to pay as little tax as you can for the same reason. Most people will spend or invest it far more efficiently that Governments anyway.
October 31, 2025
I understand Mr Redwood’s sense of grievance, and I very much look forward to the Conservatives going into the next election telling voters “oh the markets really don’t understand our policy properly, Liz Truss was right and we are going to try her plan again”. Please, go ahead, try it.
Reply This is not a Conservative site. I provide independent analysis’ based on data. No one is saying Truss was right about all aspects of her budget. I am saying as does the Bank of England the main reasons longer rates rose in Autumn 2022 were the announcement of a big Bank sales programme of gilts and the LDI crisis which made many pension funds sell gilts to pay the margin calls.It is a good idea to check the facts before sounding off. When the Bank temporarily reversed sales gilts went up sharply. Gilts gave been much lower all this year than with Truss, with consequent higher interest rates.
October 31, 2025
it’s not the pension funds making those decisions, its the assets spead forced on them by the regulators, ie the state itself.
October 31, 2025
Indeed yet another back door tax or cost or reduced returns!
October 31, 2025
I think that some years ago the pension funds were told they must hold a large proportion of their assets as government bonds. This was to reduce their exposure to shares which were said to be too risky!!!
October 31, 2025
+1
October 31, 2025
There is no doubt that precious metals are volatile. Gold and silver posted substantial gains this week, defying the traditional inverse relationship with the US $dollar as savvy investors increasingly turned to precious metals, amid geopolitical uncertainty and shifting market dynamics
The World Gold Council reported last week that investor appetite for gold continued to strengthen in 2025, with total demand for the precious metal rising 3% year-over-year to reach 1,310 tons. The organization attributed this growth primarily to robust exchange-traded fund inflows and heightened retail investment in bars and coins
Gold is real money, not a government promise to pay such as gilts. Governments cannot print gold and this is why global central banks have been buying bullion by the ton, forcing the £sterling price to over £100,000/kg this month
Given the choice between lending money to a bankrupt country with a national debt over 100% of GDP and buying a Krugerand or a Sovereign, I know which I would want
October 31, 2025
Gold is not real money. If the economy is in a state where only gold is good as a medium of exchange I would not trade you any tins of beans or food from my garden for any amount of your (mostly) useless metal – at that point there would be no local industries using that material.
Holding money as gold does nothing for the local or national economy, we need investment in economic contributors not selfish hoarders.
October 31, 2025
In that situation I guess as some are edible you could eat your orchids, carefully.
October 31, 2025
Yes commodities (tins of beans) are more valuable than gold which has very limited uses.
The Kings of Northumberland minted base metal coins called stycas until around 855 when Viking raids throttled that sophisticated token of trading useful stuff, commodities and skills.
The Age of Enlightenment is being snuffed out, not for the first time.
October 31, 2025
Afraid long term saving and investing in anything now seems almost pointless, as the taxation system will hammer you whatever you do, and inheritance tax will then crush the rest.
Passing some wealth/savings down through the generations was the mantra that John Major wanted, and was a laudable aim to encourage ongoing self sufficientcy and financial prudence, but successive governments with their grab as much as you can now polices have simply made that plan almost a waste of time.
As both of my daughters have advised, what is the point Dad, just go and spend it, and enjoy it whilst it lasts, then ponce off the government/present day taxpayer, like so many others do when it all runs out.
A policy that will eventually end in tears for everyone, as increasing government support for a fast growing number of people, is simply not sustainable.
October 31, 2025
The previous Conservative and Labour Councillors at Lancashire County Council invested £436 million buying Government and Corporate Bonds using council tax money, which don’t mature for 100 years. A five-year bond worth £350m – issued by the county council back in 2020 – matured in March, leaving a £291m borrowing requirement remaining. A further £350m worth of loans will also come to maturity next year. This is scandalous. Now they don’t have enough money to provide essential services.
October 31, 2025
Thank you for todays posting John, which is the clearest explanation I have heard thus far about Bond Purchase.
I have never understood why anyone would purchase Government Bonds at the issue price when returns/interest rates were so low, for the very reasons you outline, as you are in effect locked in to a low return asset/Bond which is falling in value until it matures.
Thus doing the opposite, and Purchasing older Bonds at a much lower value than issue price, and when it is closer to its maturity date (and issue price) is PERHAPS more sensible for some who are prepared to wait, but again needs very careful thought. Thus this is certainly not for the faint hearted, and certainly is not financial advice of any kind.
Who do you trust most with your money, yourself or the Government is the question anyone should ask themselves.
October 31, 2025
I agree, our host has provided a very helpful summary.
I always avoided investing in gilts because I didn’t understand the risks and they always seemed to be geared to the big boys so very easy for us minnows to get fleeced. Also, the government’s incentive would always be to reduce debt as opposed to equities where there is more a semblence of companies trying to grow and become more prosperous. Not to ignore the risks but I’ve stuck with equities and was happy withh my investment outcomes … until the banditry of the last two governments.
As your daughters advise I have also increased my “Investment” in my family and myself.
October 31, 2025
Nobody seems to be reporting this today, but the Russians have announced a unilateral “micro-ceasefire” near Kupyansk and Pokrovsk, where the fighting has been particularly savage this week
The Russian MoD claimed that the Russian military is willing to observe a five-to-six-hour ceasefire and allow journalists to receive unimpeded entry and exit corridors to these towns, but that the ceasefire is contingent upon security guarantees for the journalists AND RUSSIAN FORCES
Kremlin-affiliated Russian milbloggers have notably acknowledged that the micro-ceasefire is part of a concerted Kremlin informational effort, commenting that the ceasefire is an “unusual step in the [Russian] information war”
The Russians have been losing 2-3 thousand men daily in the Pokrovsk salient. The defending Ukraine army is still holding them back, tho at considerable cost to themselves
Clearly, the Russians wish to use any “micro-ceasefire” to withdraw from this area. The Ukrainians should use this notable Russian defeat to turn it into a rout.
October 31, 2025
Shorting guilts at a time of low interest rates and thinking it safe shows a complete lack of understanding of economies.
Holding a guilt at 0.5% to term must have been part of the plan when buying them in the first place. There must have been a growth plan for the funds which took into account 0.5% annual return as part of the portfolio.
Why then short the guilts? It could only go badly.
Reply They are Gilts. They were not shorting them. They bought geared LDI funds on margin. Difficult to see why they wanted 0.5% a year for so long as a return.
October 31, 2025
difficult to see any upside to the transaction to be honest
October 31, 2025
I beieve many of the funds hit by LDI were managing final salary pensions that had committments they could no longer meet, so gambled on the leveraged approach. It was common advice from the Financial Industry to move to a 40/60 or 50/50 bond/equity mix as retirement neared. I initially took this advice but fortunately realised that it could be mistaken under some circumstances. Frankly much of the Financial Industry is populated by people who seem to run on these “rules of thumb” rather than really know what they are doing (and why).
The BoE and Pension Regulator have no such excuses over the LDI scandal however, it was flagged up 18 months prior by experts but ‘wiser’ Trustees had already avoided them anyway. Ms Truss got tangled up in a mess not of her own making. Andrew Bailey was the one who should have been fired!
October 31, 2025
I was aware of the same risk management habit of reducing equities in favour of bonds when I first retired but talked things through with my advisor and decided to stick with an broadly spread equity based strategy. The other general rule of thumb at the time was to stick to a 4% annual withdrawl which I have also ignored, varying what I do as circumstances dictate – since the increase in taxes several years ago I have limited my taxable withdrawls and will continue to do so as long as I can with this current rapacious, gangster government.
October 31, 2025
If the government wants institutions to invest in UK shares, who will buy all the debt they want to sell?
Reply part of the argument is to switch some overseas shares into UK
October 31, 2025
If they government want you to invest in something then do not do it – that would be my advice! If you look at BoE investment of their own pension funds these indicate far more about what the bank really thinks than anything they actually say!
October 31, 2025
People have been bedazzled by Growth over Value.
Looking at the NASDAQ we’ve had unbelievabe valuations (Tesla P/E is still at 308 this morning) and people are still pitching in. In fact the FTSE 100 has been undervalued & unloved for some time but has offered good value and decent dividend returns. “But it’s been underperfoming for so long” I hear the pundits say. Yes, maybe but if you are drip feeding money in and buying low (and getting a decent dividend return too) that’s not such a bad deal over the longer term.
It seems that recently others have been realising this too, as the FTSE 100 is up 20% this year and still managing 3%+ overall dividend yield. This has pushed the P/E up to about 19 (from 12-14 over the past few years) unfortunately but you can’t have it both ways. Mr Market used to ask, “If you live on Hamburgers, do you want your minced beef to be cheap or expensive?” I prefer it cheaper myself.
October 31, 2025
Why have the flaws as pointed out by FCA in LDI funds been not addressed. Why did the boss of the FCA at the time when pointing to the problems in the funds do nothing?
Reply Too many proposed them. Most pension funds who did over borrow through highly leveraged LDI funds have now reduced their effective borrowing levels.
October 31, 2025
How have that privilege few that managed to get ‘Bonds’ sold at a loss to move them off the books do?
I should have said those that had the price of their bonds subsidised directly by the Taxpayer, sold at a loss to the Taxpayer
October 31, 2025
Anyone involved in pension fund investing who doesn’t understand duration needs to be fired and sued immediately.
October 31, 2025
Of course the most notable pension fund which had used an LDI fund (albeit managed by a third-party) and so was at risk from the collapse in bonds was the Bank of England’s own pension fund. Something of a conflict of interest then when they took emergency moves to prop up the bond market (and thus eject Truss as collateral damage) to say nothing of their misunderstanding of risk which caused them to invest in LDIs in the first place.
October 31, 2025
RG – The (then) Chair of The Pensions Regulator (Sarah Smart) had previously spent 14 years at Standard Life where “she had a senior role” in developing (guess what?) LDI products. The PR later claimed that there “was no conflict of interest” because she hadn’t been involved with LDIs in the last three years of her time at Standard Life.
The details were published by The Daily Mail and can still be found here:
https://mailonline.pressreader.com/article/283678303554139
I have to say, even if there was ‘no conflict’ – she certainly should have known enough to realise the risks involved – after all that was her job!
October 31, 2025
The often-muted rumor on the Governments view on cash deposits/ISA’s vs Stocks. Highlights the lack of understanding. The thinking is pushing more people towards stocks & shares and the country will bloom. The bit missed is that is exactly what cash deposits do, financial institutions take cash invest it and pay interest. Removing interest paying deposits removes the availability of financial institutions to supply loans for investment to buy homes and to grow businesses.
The important bit is having people creating their future funding store. However, the Marxist Politburo running the UK Parliament doesn’t want people to endeavor to stand on their own feet, they need more and more on the gravy train as being beholden to them – the Politburo. That way the get the forced control they need to feather their own nests. That’s why all the Parliaments policies are aimed at restraint not growth, they have a mortal fear of the people, they will fight the people as if it is saving their own lives.
October 31, 2025
‘Rachel Reeves says she didn’t
know about rental Licences.
When she finds out about
National Insurance she’s
going to be astounded.
All credit to Matt(always getting UK politics right), at the Daily Telegraph
https://www.telegraph.co.uk/news/0/matt-cartoons-october-2025/
October 31, 2025
I am now drawing my pensions, both from my private and government pensions, as I retired a few years ago.
But, reading today’s article, I am horrified at the ignorance of the people running pension funds. If they don’t understand the basics of investing in government bonds, it does not inspire confidence!
October 31, 2025
Investing in government is never a sensible play.
Case in point. $450 million was invested by the Californian state public pension fund in green policy support in 2005. The fund was invested in all the must have green industry developments that would become the great success of the future. The fund has lost $330 millions in value over that time. Losses having to be covered by Californian tax payers….again
Had the fund managers invested the same $450million in a simple fortune 500 tracker it would have grown to $2,800 million over that dame period. The state of California’s pension investment manager and assistant were/are paid $2million/yr. each for their expertise in investment management of the government’s pension funds.
Their incompetence makes Gordon Brown’s efforts with gold look positively amateur.
October 31, 2025
After Gordon Brown’s disastrous Gold reserves sell out and massive bloating of state spending ever since it would be wise to have gold-backed tracking investments as a safer bet than unsafe govt bonds.
Obviously the large pensions providers have to have a risk mix and show some loyalty to the country but have been pressured more by this dysfunctional government recently but are reluctant based on its shaky thinking, headed by Rachel Reeves.
October 31, 2025
A good level of inflation is a wonderful thing – for a government. It inflates away debt.
Then a poor yield on gilts is a good thing too if your regulations require the pensions of oldies be invested in gilts. Of course no sensible trader would invest in such gilts – unless government rules required such. The effect is much like inflation – removing money from the oldies.
After all, they have unjustifiably accumulated huge housing and pension wealth and that money is just ripe for plucking. The scammers and pig butchers are not just on the internet, they are on the end of a tax form too.
October 31, 2025
Sounds like you know nothing sensible by your unwise and unkind comments Jim. Never knock it until you have tried it, getting Old that is – you will just love what you wish for.
October 31, 2025
Was it painful – the irony bypass.
I am rather old, but retain a sense of humour.
October 31, 2025
Sounds like you don’t Jim – “they have unjustifiably accumulated huge housing and pension wealth and that money is just ripe for plucking”.
October 31, 2025
Except inflation doesn’t inflate away the 25% of government debt that is index-linked, a far higher percentage than any other major economy (Germany 5%) which was a very bad decision indeed by whoever decided to issue it.
October 31, 2025
It is alarming and astonishing to think those with investment responsibility in some pension funds do not understand “the value of your government bonds can go down as well as up”.
Before UK pension funds will invest extensively in UK equities, will they not be looking for at least a reversal of some sort as appropriate to the present tax regime of Chancellor Gordon Brown’s elimination of dividend tax credits?
October 31, 2025
I think Harvey Proctor is right to criticise the treatment of Andrew Windsor. Andrew might well be vain, greedy and have questionable morals but he has never been found guilty of any crime and indeed has never stood trial.
I can well understand why Mr Proctor feels so strongly about this (given his own experience) but I also worry about the possible outcomes of this humiliation and do wonder if the King may come to regret his decison.
October 31, 2025
And in othe mad news
Just Stop Oil activists who defaced Stonehenge cleared of wrongdoing after using Articles 10 and 11 ECHR human rights defence the right to protest and free speech …..madness