Retail investors flock to gilts in first two weeks of 2025

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Consumers poured money into gilts in the first half of January after a sell-off in UK debt markets boosted yields and lured retail investors hoping for tax-free gains.

UK government borrowing costs have risen in recent months as a global bond sell-off has coincided with concerns that the UK could enter a period. InflationWhile persistently high prices prevent the Bank of England from cutting interest rates to boost sluggish growth.

Retail investment platforms AJ Bell and Hargreaves Lansdowne saw an increase in gilt-buying in the first two weeks of this year, as UK 10-year bond yields rose to a 16-year high of 4.93 percent from 3.75 percent in mid-September. Percentage last week.

But the Gilts rallied later this week UK inflation data The BoE quickly opened the door to a rate cut, a move that strengthened US inflation dataTaking the yield back to 4.73 percent by Thursday afternoon. Yields move inversely to prices.

Gilts held directly are exempt from capital gains tax (CGT). This means retail investors who buy gilts trading at a discount of £100 to face value can earn a tax-free return, either by redeeming the £100 at maturity, or by selling above the price at which they bought it. Regular interest payments to bondholders, known as coupons, are taxed as income.

AJ Bell said gilts have been its most popular investment product so far this year, but noted that “those who work in gilts represent a relatively small number of our clients, typically dealing in large sums. Your average investor is [is] A multi-asset fund is more likely to put much less than buying gilts outright.”

In the first two weeks of 2025, Hargreaves Lansdowne recorded 6,100 gilt purchases by its clients, the highest fortnightly figure since October. Hargreaves clients have placed £225m in gilts so far this year, a 123 per cent increase in the first two weeks of 2024.

“The recent rise in yields, with the 10-year gilt yield approaching 5 per cent, has made gilts front-page news again and offers attractive returns,” said Sam Benstead, fixed income lead at investment platform Interactive Investor.

Interactive Investor said it saw a 59 percent increase in gilt sales in the first two weeks of January 2025 compared to the same period a year earlier. But it said “the growth in gilt purchases was stable over the last year – just not jumping outright in January”.

Dan Coatsworth, investment analyst at AJ Bell, said savers had piled into low-coupon gilts to take advantage of the CGT discount.

Low-coupon gilts pay less of their return as taxable coupon payments — instead, most of the return comes in the form of capital gains, which are tax-exempt. Bonds are “popular with people who want to buy gilts at a discount and sell them when the price goes up”, says Coatsworth.

Those buying low-coupon gilts are likely to be “high-income people who may have used them [tax-free] Isa allowance of £20,000”, he added. “Purchasing gilts in a dealing account is attractive to many people in these circumstances as it is a way of shielding any gains from the taxpayer. . . You can sell whenever you want, unlike holding gilts in a pension where there are age-related restrictions on your withdrawals.”

Hal Cook, senior investment analyst at Hargreaves Lansdowne, said the tax benefits of low-coupon gilts would not necessarily discourage retail investors from buying high-coupon products. “They have low-coupon-like overall yields [bonds] With similar maturity dates, but higher coupon gilts have higher returns in the form of income rather than capital gains. This may be more appropriate for some investors, depending on their personal circumstances and tax position, as well as whether they are buying gilts in a tax-wrapper or an un-wrapper account.”

Some of the longer dated gilts also proved popular. TG61, a bond with a coupon rate of 0.5 percent that matures in 2061, topped Hargreaves Lansdowne’s list of most-bought gilts and second on Interactive Investor’s list.

TG61 is highly sensitive to interest rates due to its long maturity date, and its price has declined rapidly as gilt yields rise.

Benstead said that “its appearance on the most-bought list shows that some investors are betting that interest rates will fall more than the market expects, which could lead to a big rally in the price of this gilt.”

Investors can gain exposure to gilts by buying exchange traded funds or funds that invest in gilts, but they must buy gilts directly — either at auction or in the secondary market — to benefit from CGT relief. The easiest way to access them directly is to buy them on the London Stock Exchange, which is relatively easy through “ [investing] Platform and bank,” said Cook, of Hargreaves Lansdown.

Additional reporting by Ian Smith