DIY investors have shown an increasing interest in buying government bonds in 2023 as interest rates have risen, with one investor platform reporting an increase of over 800% in trades compared to last year.
UK individual private investors have been directly buying gilts that are set to mature in the next few years, rather than just fixed-income and money market funds, though those have been popular too.
Gilts are UK government bonds, issued by HM Treasury and listed on the London Stock Exchange.
As the Bank of England has hiked interest rates from near zero at the end of 2021 to 5.0% this month, the knock-on effect is to send gilt yields higher as their prices fall, as with dividend yields on shares.
In the past fortnight, short-term gilt yields surpassed the levels seen in the wake of September’s mini-Budget and reached levels last experienced before the 2008 financial crisis led to interest rates being slashed to historic lows.
Interactive Investor (ii), the second largest investment platform in the UK, said direct fixed income trades had increased 879% year-on-year so far in 2023, while the latest monthly data published by the Investment Association revealed money market funds and gilt funds were two of the three best-selling sectors.
Bonds maturing in 2024 were the most popular, followed by 2025 and 2023, said the platform, which is owned by Abrdn PLC (LSE:ABDN).
Popular but still a small proportion
AJ Bell, the third largest UK platform, said its second most popular trade in the first quarter of the year was an individual UK gilt, measured by net value of all trades, and of the of the top 20 most popular investments, two were gilts and another a bond ETF.
But a spokesman for AJ Bell noted that while investor interest has increased, the numbers are "still very small compared to the volume of people purchasing funds and shares".
"It is the sort of thing some investors might look to if they have a specific investment need and a good grasp of the way gilt markets operate. But the vast majority of customers will favour funds and shares, including bond funds," he said.
Hargreaves Lansdown, the largest of the UK platforms, said purchases on its platform have increased "15 fold" in the last year, the majority of which are short-dated.
"Short term gilts are attractive for investors, especially higher rate taxpayers who have already used their ISA allowance given that the gains on gilts are capital gains tax free," a spokesman said.
They noted that a 0.125% US Treasury maturing on 31 Jan 2024 pays little income however can currently be bought for just over 97p, providing an annualised tax-free capital gain of over 5% when they mature at 100p in just over six months' time.
An alternative to equities
Normally a platform for ISA and SIPP investors to buy shares and funds, the platform said it had seen growth in “all things bonds related in recent months, as rising yields has meant that they have started to offer a genuine alternative to equities”.
Traffic to the bonds pages on ii’s website is also up over 2,500% in the last 16 months, it said, counting click-throughs from Google for terms such as ‘ii bonds,’ ‘buy bonds,’ and ‘buy gilts’.
This was helped by an editorial decision to increase the number of articles and research on bonds and money market funds, ii said.
Investors mostly buying gilts set to mature in 2024, 2025 then 2023 “suggests investors are holding the gilts to maturity, locking in yields of more than 5%”, said Sam Benstead, ii’s deputy collectives editor.
The gilts named TN24, which matures on 31 January 2024; TN25, which matures on 31 January 2025; and TG23, which expires on 22 July 2023, are all low-coupon bonds trading below par.
A coupon is the rate of interest paid and the par value is how much the government will pay back on the redemption date. Below par refers to a bond price that is currently below its face value, or trading at a "discount" with the price quoted below 100.
This means most of the returns will come when the gilt pays back its £100 principle on maturity, said Benstead.
“This capital gain is tax-free, making these gilts especially attractive for investors who have used up their ISA allowance. Cuts to the tax-free capital gains allowance are making gilts an even more effective way of reducing tax bills,” he added.
The most popular gilts on the ii platform over the year-to-date 2023
- TN24
- TN25
- TG23
- TG61
- TR25
- T23
- TR28
- TG24
- TR27
- T42
- TR38
- TR32
Some long-dated gilts have also been popular, for different reasons.
TG61, a bond with just under 40 years until it matures (22 October 2061), is an example.
“Long-dated bonds are most sensitive to changes in interest rates, and so will generally fall in value the most when rates rise, but rise the most when they fall,” explaims Benstead.
“The popularity of this bond suggests that some investors could be betting that interest rates will fall faster than the markets expect and hope to sell the gilt for a capital gain before it matures.”
This would also be tax free, with income paid by gilts taxed if held outside an ISA or a SIPP.
“Investing in fixed income directly requires careful research, and an alternative would be money market funds, which offer the income of gilts, but without the complexity, while also mitigating the risk of bond price fluctuation – but it’s still important to do your homework," Benstead said.
** Updated: Adds more comments, data and examples. **