The International Monetary Fund (IMF) has issued a warning about the growing risks to the UK government bond market, citing increased dependence on hedge funds and foreign investors as key concerns for financial stability.
In its annual review of the UK economy, the IMF flagged mounting vulnerabilities in the gilt market, where traditional long-term investors such as pension funds and insurers are stepping back from longer-dated government debt. This retreat is leaving a larger share of the market in the hands of short-term, high-risk players.
Hedge funds now account for almost one-third of all transactions in the gilt market, according to the IMF. These investors typically operate with high leverage and short investment horizons, increasing the risk of abrupt and disorderly price swings.
“When a large share of the market is held by entities with short investment horizons and higher leverage, the risk of disorderly market movements increases,” said Luc Eyraud, the IMF’s mission chief to the UK.
The warning comes as the UK faces a complex economic backdrop, with the Bank of England continuing its programme of quantitative tightening — selling off gilts accumulated during previous stimulus efforts — while the government steps up borrowing to cover rising public expenditure. The Debt Management Office (DMO) has been increasing bond issuance, particularly at the short end of the maturity curve, in a bid to avoid locking in higher long-term interest rates.
The yield on 30-year gilts recently climbed to 5.5%, the highest in over 30 years, reflecting rising borrowing costs and investor caution. The IMF welcomed the DMO’s shift to shorter-dated debt, noting it could help mitigate some of the financial pressures caused by long-term liabilities.
The gilts market was previously shaken by the fallout from the 2022 mini-budget under then-Prime Minister Liz Truss, when a rapid sell-off of long-dated bonds by pension funds triggered an emergency intervention by the Bank of England to stabilise markets.
While markets have since recovered, the IMF stressed that the current investor composition leaves the system more vulnerable to external shocks. The Fund pointed to global volatility — such as the recent spike in US Treasury yields and renewed trade tensions — as potential flashpoints that could spill into UK markets.
In its recommendations, the IMF urged UK authorities to prioritise active monitoring of market dynamics, strengthen stress-testing of financial institutions, and maintain close communication with market participants to identify and respond to emerging risks.
Despite its concerns, the IMF acknowledged the market’s resilience but warned that proactive risk management will be essential in an increasingly uncertain global economic environment.
