Bank of England policymaker warns on gilt market volatility risk

Investing.com -- The shift toward price-sensitive international investors purchasing British government debt could increase volatility in borrowing costs, Bank of England policymaker Catherine Mann said on Wednesday.

Mann delivered the remarks in a speech at the London School of Economics, following a day of market turbulence that saw British 30-year bond yields reach their highest level since 1998 and 10-year borrowing costs climb to their highest since 2008 on Tuesday. The market movements occurred amid intense pressure on Prime Minister Keir Starmer.

"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," Mann said.

She noted that international investors are increasingly filling the role previously held by domestic pension funds in purchasing gilts. This change in the investor base will likely affect the cost of borrowing, 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," Mann said. "The resulting volatility in yields could be reflected in a persistent risk premium on gilts."

Mann also stated that recent geopolitical events have reinforced how exposed the UK economy is to international shocks that might require a policy response. She added that the implications of new sources of finance for the UK current account deficit are not simple.

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