Gilts Risk More Turmoil as Swift Sellers Replace Steady Buyers | Stock Market News
(Bloomberg) — The changing face of the UK bond market is making gilts a source of vulnerability for the government at a moment when it most needs stability.
This week alone, Britain’s central bank and fiscal watchdog have both warned of the dangers of a structural change in demand that leaves the bonds at risk of more extreme moves, or even fire sales.
The message was clear: a market once dominated by steady buyers like pension funds and the Bank of England is now dangerously exposed to the whims of flightier players such as hedge funds and foreign investors.
The problem for Prime Minister Keir Starmer and Chancellor Rachel Reeves is that the shift comes at a time when they have linked their government’s economic policy directly to the trajectory of gilt yields by sailing so close to limits of self-imposed fiscal rules.
That leaves their entire agenda at the mercy of a fickle market and heightens focus on any change in fiscal policy. Numerous flip flops haven’t helped, but the reason concerns get so quickly amplified into major bond volatility lies in an under-the-hood change in the investor base.
“The UK is facing the biggest shift in structural supply and demand globally,” said Liam O’Donnell, a fund manager at Artemis Investment Management. “If I look at the biggest buyers of gilts over the last 10 to 15 years, two of them are no longer in the market.”
In the years that followed the seismic gilt market selloff that contributed to the fall of Liz Truss’s government in 2022, the securities have proved vulnerable to any sniff of fiscal excess. The latest example came just last week, when rumors of a change of Chancellor sparked a spike in yields.
But even when the problems stem from elsewhere, the UK market gets hit hard, speaking to a deeper issue.
For decades, the UK could rely on near-insatiable demand from defined-benefit pension funds looking to match their liabilities with long-dated gilts. Yet their purchases have been dissipating at the same time as the BOE — which accumulated close to £1 trillion ($1.4 trillion) of gilts through its quantitative-easing program — has been selling down its holdings, increasing the supply of bonds as the government also seeks to borrow more.
The daunting supply combined with the withdrawal of the two largest buyers means others need to pick up the slack. Funds with global mandates are stepping in, but having been burned by UK market meltdowns in recent years from Brexit to Truss’s gilt crisis, their appetite is more price-dependent.
“The UK requires investment in the country, and I don’t think that can be relied on when the political backdrop has been such a mess,” Artemis’s O’Donnell said.
While these developments aren’t unique to the UK, in many regards the nation is at the forefront of a global change in bond-market structure. Britain is also in a particularly tight spot due to the government’s self-imposed fiscal rules. Reeves left only a £10 billion buffer against these red lines in a March fiscal statement. Since then, U-turns on spending cuts, slow growth, weak tax receipts and higher spending demands mean she is now in the red, potentially by tens of billions.
That makes movements in gilt yields — a key input into the fiscal rules since they reflect government borrowing costs — extremely pertinent. At longer maturities in particular they remain stubbornly high, and this precarious budget arithmetic has already led to a series of embarrassing policy U-turns for the government.
What Bloomberg strategists say…
“The UK faces the threat of lower tax receipts without a commensurate reduction in spending, just as economic growth is lagging the pre-Covid trend. This would translate into debt rising relative to GDP. Moreover, the now-abandoned £5 billion worth of cuts to welfare spending add to the fiscal challenge, and investors will rightly seek higher real and inflation risk premiums to hold longer-dated gilts.”
— Ven Ram, macro strategist, Dubai. For the full piece, click here.
Worryingly for policymakers, gilt yields are proving prone to sudden spikes. In the autumn, a rapid jump stole attention away from Reeves’ first budget. Then in January, 30-year borrowing costs hit the highest since 1998, triggering further unwanted headlines for the government and teeing up a fiscal tightening in March. The market ructions caused by Donald Trump’s tariff announcements in April also hit gilts hard, pushing yields even higher.
“Low liquidity and a positional skew mean moves of a much greater magnitude than necessarily justified by the newsflow,” said James Athey, a fund manager at Marlborough Investment Management Ltd. “The ultimate cause is that supply of gilts is massive” and the government’s “budgetary maths are awful.”
Britain’s fiscal watchdog, the Office for Budget Responsibility warned Tuesday that the government was becoming more exposed to foreign investors because of waning pension demand. One of its models suggested the shift could add 0.8 percentage points to interest rates on government debt.
Some investors also point to the to the growth of hedge-fund strategies as increasing volatility. Their activity as a percentage of total volume in gilts on the Tradeweb platform was 59% in the first five months of 2025. That’s higher than peers in Europe and the US, and up from 44% in 2020.
The BOE mapped out similar concerns on Wednesday, warning a rapid unwinding of their trades poses a risk to financial stability. Governor Andrew Bailey cited last week’s moves as the latest evidence that “we are living in a period of more volatile markets.”
–With assistance from Isabella Ward, Leonard Kehnscherper, Andrew Atkinson and Alice Gledhill.
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