As a student of history, UK chancellor Kwasi Kwarteng will be familiar with the law of unintended consequences in politics. He may have less familiarity with Warren Buffett’s aphorism about derivatives, that they are time bombs. Kwarteng’s mini-Budget has delivered an unexpectedly quick and explosive reaction in the gilt market this week partly due to derivatives used by pension funds.

The problem is that some pension funds have spent so long protecting themselves from falling gilt yields, which cause defined benefit liabilities to balloon, that any leverage used in their hedges may have been ignored. Sharp rises in gilt yields mean pension funds have had to hurry to make added collateral payments on interest rate hedges, forcing added gilt sales.

A low and declining interest rate environment has increased the present value of long-term pension liabilities resulting in funding deficits, which pension watchdogs frown upon. One means of protection, so-called liability-driven investment strategies, help pension funds to match long-term member commitments with assets. That could mean swaps where fixed interest payments are exchanged for paying out floating rate ones, bad news in the current environment.