Figures from the Bank of England show that overseas buyers snapped up £11.3bn in gilts in April, taking the total for the rolling 12-month period to £89.8bn, the highest ever © Bloomberg

Foreign investors bought a record-breaking volume of UK government debt over the past year, helping to fund the unprecedented levels of borrowing during the Covid-19 pandemic.

Figures from the Bank of England this week showed that overseas buyers snapped up £11.3bn in gilts in April, taking the total for the rolling 12-month period to £89.8bn, the highest ever.

Analysts said the last-minute UK-EU trade deal struck in December had assuaged fears of a fresh tumble in the value of the pound when the UK left the block at the end of January, releasing pent-up demand for UK assets. Meanwhile, some buyers in economies such as the eurozone and Japan, where the safest government debt trades at sub-zero yields, have also been drawn to the relatively high-yielding gilt market.

“The return of investment inflows back into the UK following the Brexit deal release valve has been a key driver,” said Agne Stengeryte, a rates strategist at Bank of America. Foreign buying of gilts could provide a further boost to the pound, which has gained almost 4 per cent against the dollar this year, she added.

Line chart of Change in UK government debt holdings  (£bn) showing Foreign investors snap up gilts at a record pace

Despite the record inflows to the gilt market, the proportion of UK government debt owned by foreign investors has actually fallen since the onset of the coronavirus pandemic, because of the sheer scale of government borrowing. The Debt Management Office sold £485bn of gilts in the 2020-21 fiscal year, more than double the previous annual record.

According to the DMO’s most recent quarterly report, overseas investors owned 28 per cent of gilts at the end of 2020, compared with 30 per cent a year earlier. The Bank of England became the biggest player in the gilt market over the same period thanks to its quantitative easing programme, under which its holdings grew from 23 per cent to 32 per cent.

“On the surface it’s a relief that in such issuance-heavy times overseas investors are buying gilts at such a pace,” said John Wraith, head of UK rates strategy at investment bank UBS. “But it’s been dwarfed by BoE asset purchases.”

With the central bank on course to end its bond-buying programme by the end of the year, the government would be hoping foreign investors will be keen to buy similarly large amounts for years to come, as issuance was expected to remain high, Wraith added.

“The BoE is stepping back and we’re going to see issuance of more than £200bn a year at least until 2025,” he said. “If foreign investors don’t want to buy them [gilts], then you are looking at a market where supply is uncomfortably high relative to demand.”

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