The UK government bond market weathered April’s bout of global turbulence with surprising resilience, according to a report from the Bank of England (BoE). While liquidity in gilts temporarily worsened, the deterioration was far less severe than in recent stress episodes, underscoring the market’s growing robustness in the face of shocks.
The central bank’s study shows that gilt market conditions tightened in early April after US tariffs announcements triggered sharp swings in global sovereign debt. Bid-offer spreads widened, trading costs rose, and futures market depth briefly thinned. But unlike the “dash for cash” in 2020 or the liability-driven investment (LDI) crisis of 2022, liquidity strains quickly abated.
The Bank’s Gilt Market Illiquidity Index, an aggregate gauge derived from price impact, spreads and transaction costs, spiked only modestly before reverting to pre-April levels within days. By contrast, during the Covid-era sell-off and the LDI-linked fire sales, liquidity collapsed to extremes, forcing policymakers into emergency interventions.
“Overall, liquidity conditions in April were commensurate with the degree of volatility at the time,” the BoE wrote, adding that stress levels remained within the historical range observed since 2020. Market intelligence gathered from dealers and investors confirmed that, while conditions felt thinner, they were nowhere near dysfunctional.
With more than £2 trillion of gilts outstanding, the market anchors the UK’s financial system: benchmark yields guide the pricing of corporate debt, mortgages and loans, while gilts themselves serve as the primary collateral in banking and derivatives markets. Any serious disruption risks impairing monetary transmission and financial stability.
April’s episode also highlights the enduring link between volatility and liquidity. As prices swung, market makers pulled back, trading in smaller sizes and widening spreads to protect against risk. Yet the BoE judged the response proportionate, contrasting with the disorderly spirals of past crises.
Jo Burnham, margin expert at OpenGamma, said in emailed commentary: “It’s encouraging that April’s volatility didn’t spark the kind of liquidity crisis we’ve seen before. However, this should not mask the structural risks. Pension funds still need far more sophisticated margin and liquidity frameworks to avoid being caught short when markets turn.”