Readers Question: If the markets decide the UK is not such a safe haven and bond yields rise will pension funds heavily weighted in Gilts tend to fall?
If investors feel that the UK is not a safe haven (they feel increased risk of UK government default). Then investors will sell UK bonds, this will lead to a fall in the value of bonds, and push up interest rates on UK bonds (see: relationship between value of bonds and interest rate)
This would mean that pension funds who had bought UK gilts would see a fall in the market value of their purchases.
If UK faced a debt crisis, it would cause other problems for pension funds.
- There would be increased pressure for government to rush through austerity measures (more spending cuts). This would lead to lower growth and push UK back into recession. This would lead to a fall in the value of shares causing a further fall in the value of pension funds.
- Bank of England would keep interest rates low for longer, and may pursue more quantitative easing which increases risk of inflation – harming savers.
It would also reduce the value of the Pound as foreign investors held less UK assets. This uncertainty and falling exchange rate would further discourage people from investing in UK assets.
Is the UK Likely to Default?
I wouldn’t worry too much. I don’t believe the UK is at risk of default. Bond yields in the UK have fallen (unlike countries in the Euro).
UK debt default? written in 2010 but still relevant.