Retail investors flock to gilts in the 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 pushed up yields and attracted retail investors hoping for tax-free gains.

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

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

But the gilts rallied this following week UK inflation data opened the door to faster BoE rate cuts, a move reinforced by US inflation datataking the yield back to 4.73 percent as of Thursday afternoon. Yields move inversely to prices.

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

AJ Bell said gilts were its most popular investment product so far this year, but noted that “those dealing in gilts tend to represent a relatively low number of our clients, typically dealing in larger sums . Your average investor (is) more likely to put a much lower amount into a multi-asset fund rather than buying gilts outright.”

In the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gold purchases from its clients, the highest five-yearly number since October. Hargreaves clients have put £225 million into gilts so far this year, a 123 per cent increase over the first two weeks of 2024.

“The recent spike in yields, with the 10-year yield approaching 5 per cent, has again made gilts front page news and demonstrated the attractive yields available,” said Sam Benstead, head of income fixed in the Interactive Investor investment platform.

The Interactive Investor said it had seen a 59 percent increase in gilt sales in the first two weeks of January 2025, compared to the same period a year ago. But he said “the increase in gold purchases has been steady over the last year – not a complete jump in January alone.”

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

Low-coupon gilts provide less of their returns as taxable coupon payments – instead, most returns come in the form of capital growth, which is tax-free. Bonds have been “popular with people who want to buy gilts at a discount and sell them when the price goes up,” Coatsworth said.

Those buying low-coupon gilts were likely to be “people with higher incomes who were able to use their Isa (tax-free) allowance” of £20,000, he added. “Buying gilts in a trading account is attractive to many people in this situation because it is a way to protect any gains from the taxman . . . You can sell them whenever you want instead of holding gilts in a pension where you have age restrictions on the withdraw”.

Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantages of low-coupon gilts should not necessarily discourage retail investors from buying higher-coupon products. “They have similar overall yields to low coupon (bonds) with a similar maturity date, but higher coupon gilts have more of a return in the form of income rather than a capital gain. For some investors, this may be more appropriate, depending on their individual circumstances and fiscal position, and whether they buy the gilt in a fiscal wrapping or an unwrapped account.

Some long-established gilts are also proving popular. TG61, a bond with a coupon rate of 0.5 percent maturing in 2061, tops Hargreaves Lansdown’s list of the most bought gilts and ranked second in Interactive Investor’s list.

TG61 is very sensitive to interest rates due to its long maturity date, and its price has fallen sharply as gilt yields have risen.

Benstead said that its “appearance on the most bought list shows that some investors are making a bet that interest rates will fall more than the market expects, which could cause 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 to benefit from the CGT exemption they must buy gilts directly – either at auction or on the secondary market. The easiest way to access them directly is to buy on the London Stock Exchange, which “is relatively simple through (investing) platforms and banks,” said Cook, of Hargreaves Lansdown.

Additional reporting by Ian Smith