Retail investors’ participation in the gilt market

Sarah Munson and Callum Ashworth

In recent years, retail investors’ demand for UK government bonds (gilts) has increased, marking a change in the composition of market participants. The growth of retail investors, comprised of individuals managing their own portfolios, has been a global phenomenon (Foxall et al (2025)). But what’s driving this change, and what does it mean for the gilt market’s role in monetary policy and financial stability? In this post we explore how UK-based retail participants’ presence in the gilt market is changing and what that might signal for the future. We find that retail holdings of gilts remain modest, with positions concentrated in a handful of bonds. This has limited impact on aggregate liquidity indicators but can impact liquidity in these specific bonds.

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Collateral re-use: unveiling the risk of delivery failures and higher volatility in the repo market

Miruna-Daniela Ivan

The widespread practice of financial institution to re-use securities received as collateral plays a key role in the repurchase agreement (repo) market functioning. By increasing the availability of securities which can be used as collateral, collateral re-use lowers funding costs under normal market conditions, allowing collateral to flow to where it is most needed. But this activity may amplify the risk of delivery failures and increase volatility in repo rates during periods of market stress. This article explores the level of collateral re-use in the gilt repo market, applying algorithms from academic literature to the Bank’s Sterling Money Market Data, and provides supporting evidence of collateral re-use procyclicality, and its positive relation to repo rates volatility.

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Forbearance lending as a crisis management tool

Isabelle Roland, Yukiko Saito and Philip Schnattinger

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Prudential Architecture Theme which focuses on the evolving regulatory structures and fresh strategic issues for regulators and supervisors.

Interventions in corporate credit markets have featured prominently in the policy response to crisis episodes over the last two decades. Loan forbearance features prominently among those interventions by lenders and/or regulators. It is a practice whereby banks grant temporary relief to struggling borrowers, to avoid default. On balance, the literature is critical of loan forbearance in the corporate sector because of its potential to contribute to zombification – a situation where bank lending keeps unproductive firms alive, resulting in lower aggregate total factor productivity. Results from our new paper show that forbearance lending in combination with business restructuring plans can provide temporary relief for struggling firms, safeguarding output and employment, without contributing to the zombification of the corporate sector. Note that our research is focused on the impact of forbearance on the corporate sector; the impact of forbearance on lenders is a separate question outside the scope of our paper.

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Tracking the price of carbon: price substitution effects across energy markets

Dooho Shin and Rebecca Mari

The Bank of England Agenda for Research (BEAR) sets the key areas for new research at the Bank over the coming years. This post is an example of issues considered under the Financial System Theme which focuses on the shifting landscape and new risks confronting financial policymakers.

Carbon pricing has emerged as one of the main mitigation measures adopted around the world to fight climate change. In the UK and EU, increases in carbon prices in the Emissions Trading Schemes (ETS) work as an incentive to substitute away from emissions-intensive activities and sources of power. Such increases can be a result of direct government policies, but as we explain in this post, changes in carbon prices appear to be also endogenously linked to developments in energy markets. An understanding of the possible transmission channels underlying the relationship between the two is important to assess how climate-related risks are linked to broader macroeconomic developments and thus monetary and financial stability.

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Why do government bond yields drift when news is on its way?

Danny Walker, Dong Lou, Gabor Pinter and Semih Üslü

Government bond yields tend to drift higher in the days before monetary policy or data news in the UK. Over the past two decades this tendency – which we label ‘pre-news drift’ – has pushed up on yields by 2 percentage points in total over that period. The drift concentrates in pre-news periods that coincide with the issuance of UK government bonds, which is more common than it used to be. Our analysis shows that dealers and hedge funds are reluctant to buy bonds when news is on its way, which pushes up yields. Pre-news drift could affect the signal monetary policy makers draw from market rates and it could have implications for the optimal timing of bond issuance. There are further details in an associated working paper.

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Sharing interest rate risk: who is trading and what affects the costs?

Ioana Neamțu, Umang Khetan, Jian Li and Ishita Sen

What do the 2023 Silicon Valley Bank collapse and the 2022 UK pension fund crisis have in common? Interest rate risk. Several sectors in the economy run significant asset-liability mismatch that makes them vulnerable to rapid interest rate changes: pension funds and insurers have short-term cash flows and long-term liabilities, while banks follow a lend-long-borrow-short approach. While interest rate derivatives enable risk transfers to hedge these exposures, research on this market is limited, leaving important questions on the extent of risk sharing and the consequences of imbalances unanswered. We construct the largest data set on interest rate swaps using confidential Bank of England data to unlock insights into how investors use these instruments, and their relative importance in determining swap prices.

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SONIA: steady as she goes

Joanna McLafferty, Kirstine McMillan and Joseph Smart

On 7 May 2024 the SONIA rate, the UK’s risk-free reference rate, printed at exactly 5.2000% and has remained there to the end of July 2024 (the time of writing). Flatlining of SONIA is not a phenomenon we see often. Prior to this, over the past six years SONIA had been ‘flat’ for only four consecutive days, on two occasions. So how is it possible for the SONIA calculation methodology to create such a flat rate? What is happening in the underlying market? And most importantly… does the lack of volatility indicate an issue? We argue this should not cause concern since flatlining is explained by the calculation mechanics and behavioural dynamics in the market.

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Caring for the ‘future’

David Glanville and Arif Merali

Short term interest rate (STIR) futures are the bedrock of interest rate markets, used to price expectations of central bank policy rates and other UK rate derivative markets such as swaps and options (see Figure 1). They are key for the transmission of monetary policy and provide an avenue for interest rate risk hedging which is important for financial stability. Financial market liquidity usually worsens when volatility rises, however liquidity in the UK’s STIR futures during 2022 was especially poor. Liquidity in some metrics such as open interest and volumes has since improved as volatility has reduced, however our extensive market intelligence conversations suggest that many still believe there is further to go when looking ‘under-the-bonnet’ at another key metric, market depth. Volatility continues to play a role, but a reversion to publishing key data releases within market hours may help to build liquidity further.

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What caused the LDI crisis?

Gabor Pinter, Emil Siriwardane and Danny Walker

In September 2022 the interest rate on UK gilts rose by over 100 basis points in four days. These unprecedent market movements are generally attributed to two key factors: the 23 September announcement of expansionary fiscal policy – the so-called ‘mini-budget’ – which was then amplified by forced sales by liability-driven investment funds (LDI funds). We estimate that LDI selling accounted for half of the decline in gilt prices during this period, with fiscal policy likely accounting for the other half. Balance sheet segmentation and operational issues slowed capital injections into LDI funds by well-capitalised pension schemes, leading LDI funds to instead sell gilts. Our analysis shows that these frictions were most pronounced for pooled LDI funds. There are further details in an associated working paper.

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Futures under stress: how did gilt futures behave in the LDI crisis?

Joel Mundy and Matt Roberts-Sklar

When markets are volatile, liquidity tends to worsen. This makes it harder to intermediate buyers and sellers. We saw this during the 2022 liability-driven investment (LDI) stress, when the UK government bond (gilt) market exhibited extreme volatility. This illiquidity was also evident in gilt futures, derivatives that support functioning in the cash gilt market. Gilt futures are traded on an electronic orderbook, meaning we can examine liquidity metrics at very high frequency. Looking across a range of liquidity metrics for gilt futures, we find that liquidity was broadly unchanged following the Monetary Policy Committee’s (MPC’s) decision of 22 September 2022. But market functioning deteriorated heavily following the UK Government’s fiscal statement of 23 September and took a long time to recover.

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