The first month of 2025 saw the highest number of UK government bond purchases for four years on some of the UK's largest consumer investment platforms.
Amidst a flurry of interest in gilts, as a bond market sell-off saw a surge in yields – the return that an investor gets based on the interest payment or 'coupon' on a bond compared to its market price.
Trading in gilts in January 2025 on the Hargreaves Lansdown PLC (LSE:HL.) platform was 75% higher than a year earlier and close to double the amount in December, the company said. This was the highest trading volume and value in a month since 2021, it added.
A spokesman for rival platform AJ Bell PLC (LSE:AJB) said gilts had been the most popular investment among its customers for the whole of January too, based on net flows, though it was still "relatively low numbers of customers in the grand scheme of things".
Hal Cook, senior investment analyst at Hargreaves, said: "It seems the opportunity presented by the spike in gilt yields in January was too good to miss for HL clients."
He called the demand seen in January a "staggering increase" compared to a year ago and versus the final month of 2024 too, as purchases overtook previous peaks for the number of trades in October and the largest amount of assets seen last February.
"There are two factors that likely drove this marked increase," Cook said. "Gilt yields spiked higher in January, continuing a trend from September last year."
Yields in mid-January spiked for 2-year and 10-year gilts, hitting around 4.6% and 4.9% respectively, moving generally in sync with US and European yields, with economists and market observers citing various factors, including uncertainty around Donald Trump’s policies and the affordability of government debt.
With the two yields have since come back down to around 4.18% and 4.48% respectively, Cook said, "anyone who managed to time their purchases around the peak in yields (and trough in prices - prices and yields move in opposite directions) are already sat on a nice little profit".
Another potential factor he cites is a specific gilt that matured on 31 January, which had been popular amongst retail clients as it had a low coupon and so, because gilts are free of capital gains tax, the majority of recent returns from it had come in the form of a capital gain and so were mostly tax-free.
"We’re expecting February to be another popular month for gilt purchases, largely linked to the maturity of the gilt noted above on 31 January – many clients will have received their maturity payment last week and given continued elevated yields, reinvesting into another gilt may be attractive," said Cook.
AJ Bell analyst Dan Coatsworth said that while headlines last month were awash with news of a bond market sell-off, this led to retail investors’ appetite for gilts picking up, showing "there are two sides to every story".
A UK Treasury auction in early January saw £4.25 billion of 5-year gilts sold at an average yield of 4.49%, with £12.74 billion worth of bids received.
AJ Bell reported "strong demand" from its customers in this auction, with UK government bonds attracting more money on a net flow basis than any other investment on the platform at that point in the calendar year.
"The higher government bond yields go, the greater the competition against equities for investors’ money. At some point, investors will take the view that they can get a decent yield from bonds for lower risk compared with investing in stocks," said Coatsworth.
He noted that the yield on a 10-year UK or US government bond is often used as the "risk-free rate" – that is the theoretical rate of return for an investment with no risk, as neither the UK nor US government is expected to default on bond repayments.
"In reality, UK and US government bonds are not risk-free. If you buy at issue and hold until maturity and the borrower does not go bust or default, you get your coupons and then principal back. That’s in nominal terms. You still have inflation risk and interest rate risk, on top of liquidity risk, although the latter is not a concern if you buy at issue and hold."