Problems and Solutions in the Bond Market of UK

Abstract

The global economy after the COVID-19 pandemic, continues to face challenges by widespread inflation. In response, central banks globally, including the Bank of England, have started cycles of interest rate raise to control inflationary pressures, directly affecting the bond market by increasing bond interest rates. Under the latest market situation, it is necessary to analysis the potential problems in bond market, to further understand its impacts on economic development and monetary policies. The UK bond market is sensitive to monetary policy, particularly during periods of economic distress. For example, when the Bank of England introduced a sudden reversal in policy from quantitative tightening to urgent bond repurchasing program in September 2022, the bond market has volatile response to changes in fiscal and monetary strategies. There is market segmentation in the UK bond market significantly impacts liquidity, particularly during periods of market stress or financial crises. This segmentation effect caused by investor preferences and maturity structures, results in liquidity differences that increasing funding costs. UK government have large burden of bond interest payments, which are mainly driven by high inflation rates and the bond structure with large proportion of inflation-indexed bonds. To mitigate these problems, it is recommended that the UK government implement transparency policy changes, with clearly identify these problems, adopting the recommend approaches to deal with problems from various aspects.