In its annual health check of the UK economy, the IMF said the gilts market was showing signs of potential “vulnerability,” particularly as traditional long-term investors — such as pension funds and insurers — retreat from holding longer-dated debt.
According to the Fund, hedge funds now account for nearly a third of all UK bond transactions, raising concerns over the market’s stability during periods of stress. These highly leveraged investors are more likely to react swiftly and unpredictably to shifts in sentiment, leading to potentially destabilising volatility in gilt prices.
“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 rising borrowing costs amid increased bond issuance and continued “quantitative tightening” by the Bank of England, which has been offloading gilts since 2022. Both developments are weighing on the supply and demand balance in the gilt market.
Increased bond sales by the Debt Management Office (DMO), which is raising capital to cover elevated public spending, have added to the pressure. The IMF noted that these conditions have contributed to rising yields, especially at the long end of the curve. The yield on 30-year gilts recently hit 5.5 per cent — the highest in more than three decades.
The Bank of England and the Treasury were praised by the Fund for adapting their approach, particularly the DMO’s decision to issue more short-dated debt, which reduces the risk of locking in higher interest costs over the long term. DMO co-head Jessica Pulay recently said the move reflects the “declining strength” of demand from long-term institutional investors.
The UK gilt market was last thrown into turmoil during the aftermath of Liz Truss’s September 2022 mini-budget, when a collapse in investor confidence forced pension funds to sell off long-dated gilts en masse, prompting emergency intervention by the Bank of England.
Since then, market sentiment has remained fragile, with the UK’s bond market highly sensitive to global events. The recent uptick in yields has mirrored movements in US Treasuries, triggered by renewed trade war threats from President Trump.
In response, the IMF urged UK authorities to maintain “close monitoring, regular stress testing and continued engagement with market participants” to help detect risks early and prevent future destabilisation. While the Fund acknowledged that the gilt market has so far shown resilience, it emphasised the importance of proactive risk management in the face of a shifting investor base and uncertain global outlook.
