Bank of England policymaker Catherine Mann warned that a shift in the composition of buyers of British government debt toward internationally based, price-sensitive investors could increase volatility in the cost of government borrowing.
Speaking at the London School of Economics, Mann made the comments after a session of market turbulence in which British 30-year bond yields climbed to their highest level since 1998 and 10-year yields rose to levels not seen since 2008. Those moves took place on Tuesday amid intense pressure on Prime Minister Keir Starmer.
Mann said that while investors who react strongly to price can help lower the level of interest rates, they also tend to be more reactive to shifts in interest-rate expectations driven by either domestic developments or global shocks. In her words: "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," she said.
She pointed to a notable change in the investor base for gilts, with international buyers increasingly taking the place of domestic pension funds as major purchasers. Mann cautioned that this evolution in who holds gilts is likely to influence the government's cost of borrowing.
Elaborating on the potential dynamics, Mann said: "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," adding that "The resulting volatility in yields could be reflected in a persistent risk premium on gilts."
She also argued that recent geopolitical events have underscored the United Kingdom's exposure to international shocks that could necessitate a policy response. Mann noted that the consequences of new financing sources for the UK current account deficit are complex, saying the implications are "not simple."
Context and implications
- Policy remarks came in the wake of sharp moves in long-dated and 10-year UK government bond yields.
- Mann highlighted a structural shift in gilt ownership away from domestic pension funds toward international investors that are more price-elastic.
- She warned that such a shift could lead to higher yield volatility and a longer-lasting risk premium if investor confidence falters after a shock.