A Bank of England policymaker has cautioned that the heavy involvement of international investors in UK government debt could heighten market volatility. Catherine Mann, a member of the Monetary Policy Committee (MPC), highlighted that overseas buyers are playing a "particularly large role" in purchasing gilts, which are UK government bonds.
Her remarks follow recent increases in gilt yields amid speculation about the political future of Prime Minister Sir Keir Starmer. The yield on the 30-year gilt has surged close to a 28-year high, surpassing 5.8% on Tuesday, while the 10-year yield has also risen in recent weeks.
As yields rise, the value of gilts declines, and higher yields raise government borrowing costs, straining public finances and potential spending plans. In a speech scheduled for delivery later on Wednesday, Mann noted that the entry of "new actors" into the gilt market increases the risk of sell-offs during economic shocks.
"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," she said. "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."
Mann also indicated that tighter monetary policy, such as higher interest rates, could trigger further volatility as these investors unwind positions. "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."
