Impact on GILTS in the event of IMF Bailout

JamTomorrow

I've been thinking a lot recently about the "what ifs" in the UK economy, particularly with all the talk about our national debt and the potential for a crisis. It's a topic that's been mentioned in the news and by some economists, even if others are quick to dismiss it as "hysteria."

My main concern is what would happen to my bond holdings in the event of an IMF bailout, which is often a last resort when a country is struggling to finance its debt. I'm hoping to get some insights from the collective wisdom here.

Here are my key questions:

1. Direct UK Bond Holdings & Bond Funds: If the UK were to get an IMF bailout, what would happen to the value of direct holdings in UK government bonds (Gilts)? And what about bond funds that hold Gilts? My understanding is that an IMF bailout often comes with austerity measures, which could impact the economy, but would it also directly affect the value of the bonds themselves? Would a "buyers' strike" from international investors lead to a sharp fall in prices, or would the IMF's involvement stabilize things?

2. GBP Depreciation and Non-GBP Bonds: A major risk associated with a debt crisis is a significant depreciation of the GBP. If this happens, does it make sense to hold non-GBP government bonds? For example, US Treasury bonds or German Bunds.

   • Is it possible for a UK retail investor to buy these directly, similar to how we can buy Gilts through a stockbroker?

   • Or would the only realistic option be to invest in bond funds or ETFs that hold a portfolio of international government bonds?

3. Inflation-Linked Gilts: In a scenario where an IMF bailout is a risk, it's often a sign of high inflation and a loss of confidence in the currency. In this context, do inflation-linked Gilts offer a degree of protection? My thinking is that their value is tied to inflation (RPI), which would be high in this kind of crisis, potentially providing a hedge against the general turmoil. Is this a sound strategy, or am I missing something?

 Any insights, experiences, or even links to good articles or youtube videos would be greatly appreciated.

Thanks.

masonic

Did you use AI to generate that by any chance?

A lot of the perceived risk to gilts is already priced in. That is why yields have been rising, particularly at the long end of the yield curve, and prices have been falling. Should things get worse then you'd see more of that. Currency devaluation and inflation go hand in hand, so inflation linked gilts are some defence against that. You should note that RPI will be harmonised with CPIH from 2030, so the benefit will be watered down somewhat (by up to 1% of what it was historically). But it seems like a fair exchange to give up a 4-5.5% nominal yield for CPIH+1-2.5% and a breakeven inflation rate of 3% if that's something you are concerned about. Particularly at the shorter end of the curve where 4 more years of RPI has a bigger impact on overall returns.

If you buy individual gilts and hold to maturity, then the price movements will be irrelevant. The only risk is not locking in to the best deal possible, but nobody can time the market perfectly. If you buy a fund and don't hold for multiples of its effective duration, then you risk selling low.

I've been more concerned about the risks of holding US Treasuries in light of policies and threats from the orange one. As such I've recently disposed of most of my global hedged bond holdings (held via an investment fund - I don't think there is an easy way to buy direct) into these discounted gilts. But I'm one of the ones who would be quick to dismiss talk of an impending IMF bailout as hysteria. If you want to see the market's current appetite for lending to the UK government, take a look at the results of last week's £5bn gilt auction: https://www.dmo.gov.uk/media/3lidrb30/270825conventional.pdf

kempiejon

I have been reading so much about the IMF coming soon it's making me eager. Surely once the UK debt is bailed out everything will be rosy?
With luck an IMF loan would likely come with conditions, potentially including cuts in government spending and reforms. The IMF's approval could boost market confidence and attract other lenders, as it did in the 1976 bailout. 

dunstonh

My main concern is what would happen to my bond holdings in the event of an IMF bailout

The IMF is not in a position to bail out the UK, and it isn't near any level that would need it.  It would be different.   A technocrat installed Government that cuts spending to where it can be afforded.

Gilt sales are still oversubscribed, and Sterling is stable.  Inflation is not near panic levels.   Growth is weak but isn't collapsing. Not the signs of an imminent bailout.  The things that the market dislikes are the current Government's preference to prioritise ideology over financial reality, its inability to cut benefits even by small amounts, and its increasing size of the state, when markets would prefer to see it reduced.   There is currently a moron premium applied to UK gilt that came about after Truss.  Sunak's premiership was seen as more stable by the markets, but the moron premium returned under Reeves/Starmer.      

Currently, the negativity towards the UK is reflected in the yields. It is pricing in a dislike of the current Government but not pricing in a bailout.  

Politics, real media, and social media are blowing the current situation out of proportion.  Action is needed, but not a bailout.

Nebulous2

There are technical moves that can be made to improve the current situation. Whether they are likely or not we will have to wait and see. 

Slowing or stopping QT is one of them. Gilts have dropped in price, so selling them back into the market  at a lower price than they were bought at has a cost. The other side of the equation is that the banks have profited from that, so a windfall tax on the banks would recoup that money. 

That's why bank shares had a bad week last week. 

My view is that the budget will do enough in terms of balancing the books to calm the markets. 

Albermarle

Nebulous2 said:

There are technical moves that can be made to improve the current situation. Whether they are likely or not we will have to wait and see. 

Slowing or stopping QT is one of them. Gilts have dropped in price, so selling them back into the market  at a lower price than they were bought at has a cost. The other side of the equation is that the banks have profited from that, so a windfall tax on the banks would recoup that money. 

That's why bank shares had a bad week last week. 

My view is that the budget will do enough in terms of balancing the books to calm the markets. 

Yes the Chancellor would rather make potentially unpopular tax decisions, than see an unstable bond market.

JamTomorrow

masonic said:

Did you use AI to generate that by any chance?

If you buy individual gilts and hold to maturity, then the price movements will be irrelevant. The only risk is not locking in to the best deal possible, but nobody can time the market perfectly. If you buy a fund and don't hold for multiples of its effective duration, then you risk selling low.

Yes, desribed to AI the question I wanted to ask then got it to expand my poor grammar, misspelt request.

So highly unlikely that my individual GILTs would not get paid, either coupon or principal on expiry.

MattMattMattUK

Albermarle said:

Nebulous2 said:

There are technical moves that can be made to improve the current situation. Whether they are likely or not we will have to wait and see. 

Slowing or stopping QT is one of them. Gilts have dropped in price, so selling them back into the market  at a lower price than they were bought at has a cost. The other side of the equation is that the banks have profited from that, so a windfall tax on the banks would recoup that money. 

That's why bank shares had a bad week last week. 

My view is that the budget will do enough in terms of balancing the books to calm the markets. 

Yes the Chancellor would rather make potentially unpopular tax decisions, than see an unstable bond market.

I think the one good to come out of Truss was that chancellors will going forward be much more conscious of their decisions, leaks ahead of time to test out potential reactions. What it has not solved is chancellors making awful decisions because they refuse to tackle taxation holistically.

Something as simple as the amount of tax that goes unpaid being around £45-55 billion per year, HMRC estimate with another £350 million for their recovery department they could recover £20-25 billion of that and £15 million for investigations could recover £2.5-3 billion from tax evasion (based on HMRC's estimate of £5.9 billion in tax evasion per year, other estimates place UK tax evasion at £10-15 billion per year so additional revenue would be even higher). 

We also have the most complicated tax laws of any nation on earth, which creates many loopholes. Simplifying the tax system could raise revenues whilst also making taxation significantly easier for individuals to understand and making it much easier to spot evasion, whilst making it easier to only allow avoidance in areas that the state wishes to offer it (pensions, childcare, healthcare, (some) education etc.).

Of course rather than anything sensible I fully expect the autumn statement to make things worse, not better. 

Gary1984

Why would we need the IMF to bail us out when the Bank of England could buy as many new gilt issues as required? It's not something I've heard anyone else suggest and does come across as hysteria I'm afraid.

poseidon1

Useful to remember that UK was approved for the biggest bailout  in IMF history ( up to that point) back in 1976, so useful to  note the factors that lead to such an ignominious outcome - see below

https://www.economicshelp.org/blog/132993/economics/uk-imf-crisis-of-1976/

As to impact on gilts and sterling in general, of course both plummeted in the fallout, however there was no  subsequent default by the UK government so one only lost if panicked into selling ones holdings. 

1976 was my first year in the job market and that was as a trainee administrator of private family trust funds. It was interesting to note how the various stockbrokering firms managing trust funds at the time not only reassured the understandably concerned trustees to hold on and not be panicked, but also picked up more bargin basement medium term gilts to the advantage of the family trusts. 

At present the IMF itself  in its last review ( barring unexpected shocks such as covid and Ukraine invaision), has not flagged any  particularly signifcant red flags that might point to any potential need to intervene here in the UK. However as we saw in 1976, never say never.


https://www.imf.org/en/News/Articles/2025/05/27/cs-uk-aiv-2025

NedS

MattMattMattUK said:

Something as simple as the amount of tax that goes unpaid being around £45-55 billion per year, HMRC estimate with another £350 million for their recovery department they could recover £20-25 billion of that and £15 million for investigations could recover £2.5-3 billion from tax evasion (based on HMRC's estimate of £5.9 billion in tax evasion per year, other estimates place UK tax evasion at £10-15 billion per year so additional revenue would be even higher). 

I agree. DWP have spent a significant amount trying to reduce benefit fraud estimated to be only a tenth of that level, yet HMRC are woefully under-funded and under-resourced to investigate and prosecute tax evasion. I guess it's a priority to go after those pesky benefit cheats but tax evasion is OK. The cynic in me says too many politicians may get caught in the net if they cast it too widely so better to stick to chasing benefit cheats.

It is generally the rich and educated that benefit from complex tax laws and the concomitant loopholes, so there is a self interest in maintaining those loopholes whilst taxing the heck out of the working and middle classes.