Closing post
BoE's Mann: Overseas gilt owners could be more vulnerable to economic shocks
Overseas investors are playing a “particularly large role” in buying UK government debt, and that leaves the British bond market vulnerable in an “increasingly shock-prone world”.
That’s according to Bank of England policymaker Catherine Mann, who is arguing in a speech today that the presence of these “new actors on the financial side” add to the challenge of managing the UK’s persistent current account deficit.
Mann says that this change in the the investor base for gilts will likely will affect the cost of borrowing on international markets – as non-domestic buyers might be more susceptible to selling gilts (pushing up yields).
And that could have an impact on interest rate policy. Mann (a member of the Bank’s monetary policy report) explains:
On the financial side of the balance of payments, the marked shift in the composition of gilt holders over time, away from domestic, long‑term, relatively stable investors and towards new actors that are more foreign, price-elastic, leveraged, and with shorter-duration portfolios may affect the monetary policy landscape.
Mann explains that if a new shock were to occur , the “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 warns.
