LONDON, May 13 - The increasing participation of price-sensitive international investors in the market for British government debt - effectively substituting for traditional domestic pension-fund demand - presents a risk of larger swings in UK borrowing costs, Bank of England policymaker Catherine Mann said in remarks on Wednesday.
Mann highlighted the potential downside of the market shift at the London School of Economics, where the text of her speech emphasized that these investors can be both a benefit and a source of vulnerability for gilt markets. She drew attention to market moves earlier in the week: "On Tuesday, amid intense pressure on Prime Minister Keir Starmer, British 30-year bond yields hit their highest since 1998 and 10-year borrowing costs rose to their highest since 2008."
In the prepared remarks, Mann 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." She warned of a specific scenario in which those investors react sharply if confidence drops: "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. The resulting volatility in yields could be reflected in a persistent risk premium on gilts," she added.
The comments underline a structural change in the composition of demand for UK government bonds. Mann contrasted the characteristics of international, price-sensitive investors with those of domestic pension funds, implying that the latter have historically provided steadier, less rate-sensitive support for gilt issuance.
Her warning arrives against a backdrop of demonstrable market stress in long-term UK government borrowing costs, with both 30-year and 10-year yields reaching multi-decade highs during a period of political strain. Mann framed the shift in investor profiles as a factor that could magnify the market response to future shocks and thereby affect the cost of government financing.
While she noted the potential advantage of lower interest-rate levels when price-elastic investors are active, Mann stressed the trade-off: increased responsiveness to shocks could produce greater yield volatility and a longer-lasting premium demanded by investors for holding gilts.
The speech did not quantify how large the effect might be nor prescribe specific policy actions; it set out a risk that could influence gilt market dynamics if investor confidence were to be undermined by a new shock.
Key points
- The rise of price-sensitive international investors replacing domestic pension funds may increase volatility in UK government borrowing costs - affecting the gilt market and fixed-income investors.
- Recent market moves saw 30-year yields reach levels not seen since 1998 and 10-year yields at their highest since 2008, coinciding with political pressure on the prime minister.
- Mann warned that a new shock could prompt these investors to reduce gilt holdings, potentially embedding a persistent risk premium - a concern for government financing and pension-sector stability.
Risks and uncertainties
- Heightened yield volatility if international, price-elastic investors react to domestic or global shocks - impacting bond markets and government borrowing costs.
- Possibility of a sustained risk premium on gilts if confidence falls and foreign investors cut holdings - with implications for the cost of long-term public debt.
- Reduced stabilizing demand from domestic pension funds as their share of gilt ownership diminishes - raising uncertainty for pension funds and fixed-income market liquidity.