The IMF has raised concerns about the UK's government bond market, citing increasing risk of price swings and sell-offs due to a shift towards hedge funds and foreign investors. Traditional long-term investors are retreating from gilt holdings, which are now dominated by highly leveraged entities. This shift leads to instability during market stress. As the UK grapples with rising borrowing costs and continued quantitative tightening, the Debt Management Office is raising capital to manage public spending, further impacting the market dynamics. Recent trends show yields on long-dated gilts rising significantly.
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.
The warning comes as the UK faces rising borrowing costs amid increased bond issuance and continued 'quantitative tightening' by the Bank of England.
These conditions have contributed to rising yields, especially at the long end of the curve, with the yield on 30-year gilts hitting 5.5%.
The DMO's decision to issue more short-dated debt reduces the risk of locking in higher interest costs over the long term.
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