A policymaker at the Bank of England has warned that international investors snapping up UK Government debt could leave the market more vulnerable to volatility.
Catherine Mann, one of the Bank’s nine-strong Monetary Policy Committee (MPC), said overseas investors are playing a “particularly large role” in buying gilts – UK government bonds.
The comments come after recent increases in the yield of the gilts in the face of speculation about the future of Prime Minister Sir Keir Starmer.
The yield on the longer-term 30-year gilt is close to a 28-year-high, having jumped above 5.8% on Tuesday. The yield on the 10-year gilt has also increased in recent weeks.
The value of gilts decreases as the yield on the bonds increases.
High yields also result in increased borrowing costs for the government and therefore put pressure on state finances and potential spending plans.
In a speech, due to be delivered later on Wednesday, Ms Mann said the presence of “new actors” buying government debt means there is more potential for it to be sold off in the face of new economic shocks.
She said: “Although price-elastic investors can be an advantage in terms of the level of interest rates, they are also more responsive to changes in interest rates on account of domestic or global shocks, which could yield more volatility in cross-border capital flows and in financial conditions.
“Hypothetically, if a new shock were to occur and weigh on investor confidence, these more price-elastic international investors could respond by reducing their gilt holdings.”
Ms Mann also indicated that tighter monetary policy – increased interest rates – could lead to more volatility due to potential sell-offs.
“Given fragilities and economic uncertainties in the domestic and global financial markets, investor sentiment can shift abruptly,” she added.
“A tighter monetary policy stance could trigger volatility as the new actors unwind positions, potentially leading to tighter domestic financial conditions than intended.”
