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Repo rates are expressed relative to SONIA, and the chart below displays the average repo rates that we have achieved over the past four quarters for three, six, nine and 12-month repos, shown as a spread to average SONIA levels at the time. The volatility and market uncertainty that resulted from the mini-Budget also weighed upon funding markets, particularly for shorter dated trades as can be seen from the achieved spreads below. Note that during the fourth quarter of 2022 no repos were traded with a 12m tenor so the chart reflects the previous quarter’s value.
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Themes
The secondary impact of the mini-Budget crisis centred around collateral and the velocity of movement; rather than a lack of balance sheet for repo funding (a la March 2020). Yet, the difficulties around collateral substitutions and settlements did in many cases prompt a review by individual banks’ credit officers, resulting in a temporary reduction or hiatus in repo balance sheet provision in some cases. Once these reviews were completed balance sheet availability opened up again – some with the addition of haircuts to provide additional protection to the bank. Of course, the momentous lack of certainty in the future path of interest rates also impacted the typical repo spread to SONIA as trading a fixed rate forced the banks to take a conservative view on where yields could reach.
All data and sources Columbia Threadneedle Management Limited, as at 30 June 2024 and Valid to: 30 September 2024
Regions
Tariff-mania largely faded into the background as central bank activity and fiscal sustainability concerns came to the fore. Whilst the UK, the US and Europe are at different stages in their monetary loosening cycle, the experience of curve steepening (longer dated yields rising relative to shorter dated yields) has been eerily similar denoting a global phenomenon.
In the third quarter of 2025 markets largely became inured to tariff announcements and rollbacks and seemed to accept this news-flow as the new normal; instead, the focus became centred on what individual economies were prepared to do to protect or defend against tariff woes and their consequent impact on growth. Europe’s central bank, the ECB, held firm on their 2% deposit rate, with many believing that this level represents the neutral rate; it is a level that permits additional loosening should the situation demand it to support European economies. The UK remained buffeted by higher than desired inflation, much of which is a peculiarity of domestic pricing policies such as the above average inflationary increases in rail fares and mobile phone contracts which contrast with much of Europe and the US. Nevertheless, the Bank of England (BoE) managed to perform one further reduction in base rate, to 4% in August. Meanwhile the US Fed had been on hold for much of 2025, hoping to parse the impact of tariff wars on inflation and the economy at large. Yet President Trump was not supportive of this passivity and embroiled himself in various mechanisms to put pressure on the Fed to reduce rates, musing over potential irregularities in office renovations and directly targeting individuals on the panel as well as publicly considering the end of Jerome Powell’s term as Chair of the Federal Reserve. Whether through threat or otherwise a vocal group calling for a reduction in the base rate started to gain traction and they implemented a 0.25% cut in September, to an upper bound of 4.25% – a trend that is widely anticipated to continue in the fourth quarter.
Yet despite the support provided by central banks, long dated yields continued to rise relative to shorter dated yields. Part of this is mechanical as short-dated yields are anchored by the base rate but in large part it reflects a higher risk and term premium placed on government debt as concerns grow over the fiscal sustainability of central governments who appear unwilling or unable to rein in their debt burden. This was particularly stark in France which displayed further political instability as a series of centrist Prime Ministers struggled to implement reforms to pension provision which forms a significant part of the growth in spending. This turmoil resulted in ‘surprise’ downgrades by Fitch and S&P. In contrast no such restraint is at play in the US as all the focus appears to be on increasing expenditure in a ‘jam today, and jam tomorrow’ approach. Sadly the UK was not immune to similar fiscal worries as the long lead time to the Autumn Budget prompted projections of the daunting fiscal hole to address and kite-flying of potential policies to remedy it.
Total interest rate liability hedging activity increased to £40.0 billion, whilst inflation hedging rose to £33.9 billion. LDI demand for hedging has been suppressed for much of 2025 given the volatility and high funding ratios, however signs of life were seen in the third quarter as schemes prepared to meet their end of year goals and take advantage of attractive yield levels. The efforts of the Debt Management Office (DMO) to skew issuance shorter to target demand were welcomed by the market community and this flexibility has allowed the DMO to handle what is in any terms a very challenging issuance cycle. Indeed, entering the fourth quarter the DMO is ahead of schedule, leaving room for potential increases in issuance resulting from the Budget. In relative value the idiosyncrasies of high coupon versus low coupon bonds continued to capture headlines. Low coupon bonds such as the 2061s were typically issued some time ago when yields were close to zero – these are heavily owned by the Bank of England through their quantitative easing programme and have seen no recent supply as it is not cost effective for the DMO. Add to this their benefits in terms of tax treatment for retail investors and their repo efficiency and thus their scarcity value, and the result is that they behave very differently to their high coupon bond neighbours.
The chart below describes hedging transactions as an index based on risk. Note that transactions include switches from one hedging instrument into another. It should be noted that as the index is constructed by using the rate of change of risk traded by each counterparty per quarter, it allows the introduction (or removal) of counterparties in the survey.
Figure 1: Index of UK pension liability hedging activity (based on £ per 0.01% change in interest rates or RPI inflation expectations i.e. in risk terms).
Source: Columbia Threadneedle Investments. As at 30 September 2025
The funding ratio index published by the Pension Protection Fund showed an increase in funding levels quarter-on-quarter (129.8% at end September vs 126.2% at end June). Higher real yields and global equity performance drove the positive outcome. The recent passing of the Pensions Schemes Bill has opened up new avenues for pension schemes as they weigh up run-on and surplus extraction versus buy-out pathways.
Market Outlook
We also asked investment bank derivatives trading desks for their opinions on the likely direction of key rates for liability hedging. The aim is to get information from those closest to the market to aid investors in their decision-making.
The results are shown below as the number of those predicting a rise less those predicting a fall, as a percentage of the number of responses. The larger the balance, the more responses predict a rise. The more negative the balance, the more responses predict a fall.
Figure 2: Change in swap rates over the next quarter.
Source: Columbia Threadneedle Investments. As at 30 September 2025
Last quarter our counterparties expected a fall in inflation and nominal yields with no consensus on real yields. They were hopeful of a reduction in geopolitical tensions allowing inflationary pressures to diminish, thus supporting further cuts from the Bank of England.
Predictions for the end of 2025 are that all three metrics will fall, however with caveats suggesting a lack of conviction on these moves. Of the positive drivers for lower yields there is hope that fiscal consolidation will be seen in the Autumn Budget allowing the risk premium to diminish with support from further cuts from the Bank of England. This view is supported by the skew in issuance from the DMO, allowing year end demand to compress nominal and real yields. Risks to these views centre again on the Budget with a risk of under-delivery on spending cuts pushing inflation higher through tax rises which are seen as negative for growth.
Given the importance of monetary policy we asked our counterparties for their expectations of the terminal level for the UK bank rate and when this point would be reached. It should be no surprise that there were a variety of views, with terminal rates ranging from 2.75% to 3.75% (note all expected at least one more cut from here). The anticipation of when this level would be reached also varied from Q1 2026 all the way to Q1 2027. Typically lower terminal rates were approached later in the cycle displaying the probability that the easing cycle would be measured, allowing the incorporation of economic releases into their decision-making.
Figure 3: Expectations of terminal Bank Rate
Source: Columbia Threadneedle Investments. As at 30 September 2025
However the outcome of the Autumn Budget will be instrumental in the delivery of these rate cut expectations. Our counterparties largely expect fiscal consolidation with some spending increases offset by higher taxation. Spending growth policies are likely to include the removal of the two-child welfare cap (estimated to cost £3.5bn per year) and eliminating VAT on home electricity (£2bn per year) – this has the side benefit of reducing headline inflation by an estimated 0.1%. It is also possible that the crowd-pleasing freeze on fuel duty could be continued which is estimated to cost £2bn per year. On the other side of the ledger there are a smorgasbord of potential measures, ranging from the incremental: rise in gambling taxation, sin taxes on sugar and increasing the levy on banks; to the weighty: freezing income tax thresholds and property and pensions raids. A significant number of our counterparties anticipate that the manifesto pledge to not raise taxes on working people may have to be broken. This could take the form of an increase in income tax or potentially a rise in VAT. Ultimately it is a challenging budget for the Chancellor and the Labour party as they attempt to assuage markets by retaining fiscal credibility but struggle within the narrow confines of their own fiscal rules to manage intransigent backbenchers and the negative growth and inflationary pressures of increases in the tax burden.
If you would like to learn more about any of the topics discussed, please contact your client director.
