Retail investors will flock to gilts in the first two weeks of 2025

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

British government borrowing costs have risen in recent months amid concerns that the UK may be entering a period of global bond selling. stagflationThis will prevent the Bank of England from lowering interest rates by permanently high prices and increasing low growth.

Retail investment platforms AJ Bell and Hargreaves Lansdown increased gilt purchases in the first two weeks of this year, with the UK 10-year bond yield rising from 3.75 per cent in mid-September to a 16-year high of 4.93 cents last week.

But the gilts gathered later this week UK inflation data It opened the door for a quick BOE rate cut, the move intensified US inflation dataThursday afternoon, taking the yield back to 4.73 percent. Products, on the contrary, move to prices.

Directly held gilts are exempt from capital gains tax (CGT). This means that retail investors who bought a gilt transaction at a discount of £100 can get a tax-free return by buying £100 at maturity or selling it for more than their purchase price. Regular interest payments to bondholders, known as coupons, are taxed as income.

AJ Bell says gilts have been the most popular investment product so far this year, but says those working in gilts represent a relatively small proportion of our clients, who typically trade in larger sums. Your average investor is more likely to put a very low amount into a multi-asset fund (rather than buying gilts outright).

In the year In the first two weeks of 2025, Hargreaves Lansdowne recorded 6,100 gilt purchases by its customers, the highest fortnight since October. Hargreaves clients have put £225mn into gilts so far this year, a 123% increase in the first two weeks of 2024.

Sam Benstead, head of fixed income at investment platform Investor Interactive, said: “The recent rise in yields, with the 10-year gilt yield approaching 5%, has again made gilts front page news and highlighted the attractive yields available.

In the first two weeks of January 2025, Gilt saw a 59 percent increase in sales, Interactive Investor said, compared to the same period a year ago. But he said “the increase in gilt purchases has been steady over the past year – not a complete jump in January alone.”

Savers have piled into low-coupon gilts to take advantage of the CGT exemption, said Dan Coatsworth, investment analyst at AJ Bell.

Low-coupon gilts offer less of their income as taxable coupon payments — instead, most of the gains come in the form of capital growth, which is tax-free. The bonds were “popular with people who wanted to buy gilt at a discount and sell when the price went up,” Cotworth said.

Low-coupon buyers are likely to be high earners who may have used their £20,000 (tax-free) Isa allowance, he added. “Purchasing gilts in a talking account pleases many people in this situation because it is a way to protect any benefit from the taxman. . . Unlike holding onto gilts in retirement where there are age-related restrictions, you can sell them whenever you want.

Hal Cook, senior investment analyst at Hargreaves Lansdowne, said the tax benefits of low-coupon gilts should not discourage retail investors from buying higher-coupon products. “They have similar overall yields to the same maturity date as low-coupon bonds, but higher-coupon gils have more returns in the form of income than capital gains. For some investors, this depends on their personal circumstances and tax position, as well as whether they buy gils in a tax-wrapped or non-deferred account.” Based on this, this may be more appropriate.

Some long-lasting gilts have also become popular. TG61, a 0.5 per cent coupon rate bond maturing in 2061, tops Hargreaves Lanstown’s list of most-bought gilts and is second on Interactive Investor’s list.

TG61 has a long maturity and is highly sensitive to interest rates, and prices have declined significantly as gilt production has increased.

“Being on the most-bought list means some investors are taking bets that the market will fall further than expected, which could trigger a big rally in the price of this gilt,” Benstead said.

Investors can gain exposure to gilts by buying exchange-traded funds or funds that invest in gilts, but to be CGT-free they must buy gilts directly – either through an auction or in the secondary market. The easiest way to get them directly is to buy on the London Stock Exchange, which is “relatively straightforward[to invest]through platforms and banks,” says Hargreaves’ Lanstaunt Cook.

Additional reporting by Ian Smith