The UK’s government bond market is increasingly exposed to the risk of sharp price swings and sudden sell-offs, the International Monetary Fund has warned, due to a growing reliance on hedge funds and foreign investors.
In its annual health check of the UK economy, the IMF said the gilts market was showing signs of potential “vulnerability,” particularly as traditional long-term investors — such as pension funds and insurers — retreat from holding longer-dated debt.
According to the Fund, hedge funds now account for nearly a third of all UK bond transactions, raising concerns over the market’s stability during periods of stress. These highly leveraged investors are more likely to react swiftly and unpredictably to shifts in sentiment, leading to potentially destabilising volatility in gilt prices.
“When a large share of the market is held by entities with short investment horizons and higher leverage, the risk of disorderly market movements increases,” said Luc Eyraud, the IMF’s mission chief to the UK.
The warning comes as the UK faces rising borrowing costs amid increased bond issuance and continued “quantitative tightening” by the Bank of England, which has been offloading gilts since 2022. Both developments are weighing on the supply and demand balance in the gilt market.
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