The International Monetary Fund (IMF) has issued a cautionary note regarding the vulnerability of UK government debt to abrupt sell-offs, attributing this risk to the growing involvement of hedge funds and foreign creditors in the bond market.

In its annual evaluation of the UK economy, the IMF identified several potential “vulnerabilities” within the gilts market. These include the diminishing influence of long-term investors, such as pension funds and insurance companies, who traditionally held longer-dated bonds.

According to the IMF, hedge funds—characterized as highly leveraged speculative investors—now represent nearly one-third of all bond trading within the UK, heightening the likelihood of significant fluctuations in bond prices during periods of market instability. As bond prices decrease due to selling pressure, yields increase, directly impacting the government’s borrowing expenses.

Additional elements such as increased bond issuance in response to elevated government borrowing, along with the Bank of England’s ongoing sales of gilts back to the market since 2022, have altered the “supply and demand” landscape for UK government debt, stated Luc Eyraud, the IMF’s mission chief for the UK.

The last substantial bond market crisis in the UK occurred following former Prime Minister Liz Truss’s mini-budget, which compelled pension funds with liability-driven investment strategies to offload 30-year gilts for urgent cash needs. The situation was stabilized when the Bank of England intervened by purchasing these assets.

Global debt markets have experienced unrest following threats from President Trump to impose hefty tariffs on China and the European Union, which has led to UK bond yields rising in line with their American counterparts. The yield on 30-year gilts has endured significant selling, reaching a peak of 5.5 percent, marking a 32-year high.

The IMF acknowledged the resilience of the gilt market and endorsed the Debt Management Office’s (DMO) strategy to issue shorter-term bonds to mitigate the risk of locking in higher market interest rates over extended periods. Jessica Pulay, head of the DMO, explained to the Financial Times that this transition stems from the “declining strength” of long-term investors such as pension funds.

The IMF urged both the Bank of England and the government to engage in “close monitoring, regular stress testing, and interaction with market players to identify and manage potential future risks.”