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The UK’s reliance on “fickle and flighty” foreign buyers of its government debt is a growing risk to the stability of the gilt market, the head of Britain’s fiscal watchdog has said.
Richard Hughes, the chair of the Office for Budget Responsibility, said on Thursday that a lack of information on the identity of overseas holders of gilts made it harder to predict their behaviour compared with domestic investors.
That relative anonymity was “definitely a risk” because “that sort of capital is almost by definition more fickle and flighty than domestic investors”, Hughes told the parliamentary public accounts committee.
About a quarter of government debt is in the hands of overseas investors, a share that has remained largely stable while the government’s overall debt load has ballooned over the past decade and a half in response to a succession of crises. The UK was “likely to have to keep looking to the foreign markets”, Hughes said, due to the government’s daunting funding needs, and waning appetite from defined benefit pensions schemes that are also big holders of gilts.
Attracting stable, long-term investors to government debt has become even more important to the UK since Mark Carney — then governor of the Bank of England — memorably described the UK as being reliant on the “kindness of strangers” to finance its deficits in the run-up to the Brexit referendum.
Sir Robert Stheeman, chief executive of the Debt Management Office, said in evidence to the committee on Thursday that annual gilt issuance had risen from less than £50bn when he took the post in 2003, to about £240bn this year — with the value of the entire gilt portfolio ballooning from £300bn to about £2.5tn over the period.
An additional challenge is that the DMO is now selling gilts into the market at the same time as the Bank of England, as the central bank seeks to reduce the stock of assets it built up under quantitative easing.
Both Hughes and Stheeman told the PAC that it had so far proved possible both to fund historically high government needs and to unwind QE without “undue pressure” on gilt markets — with the DMO and BoE co-ordinating closely in order to avoid flooding the market.
But Hughes said the OBR and DMO “share a desire for more information” on the identity of overseas investors in gilts, adding: “One would feel better if you had a better sense of who those people were because it’s likely to be the most volatile element of your debt.”
Some foreign buyers, such as pension funds, would probably look to hold gilts for the long term, he said. But if investors were “just looking for a quick return on interest rates that look a bit tasty compared to US Treasuries and German government bonds, you’d worry . . . about where they might go if those interest rates were to change”, Hughes added.
“By their very nature foreign investors are less committed to holding sterling assets . . . In that sense, our profile as a nation and as an investible proposition matters a lot more.”