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Buyers poured money into gilts in the first half of January after a sell-off in UK debt markets pushed up yields and enticed investors to sell in hopes of tax gains.
Borrowing costs for the UK government have risen in recent months as global bond sales coincided with concerns that the UK could enter a period of stagflationwhere persistently high interest rates prevent the Bank of England from cutting interest rates to fuel the growing deficit.
Retail investment platforms AJ Bell and Hargreaves Lansdown saw a surge in gilt buying in the first two weeks of this year, as the UK's 10-year bond yields rose from 3.75 per cent in mid-September to a 16-year high of 4.93 each. cent last week.
But gilts rallied strongly this week after that UK inflation data opened the door to a quick rate cut by the BoE, a move confirmed by US inflation datareturning the yield to 4.67 percent on Thursday afternoon. Yields move against prices.
Directly held gilts are exempt from capital gains tax (CGT). This means that retail investors who buy gilts trading at a discount to £100 of face value can get a tax-free return, either by releasing £100 in growth, or by selling for more than the price at which they bought it. Ordinary interest payments paid to bondholders, known as coupons, are nevertheless taxed as income.
AJ Bell said gilts have been the most popular investment product so far this year, but noted that “gilts traders tend to represent a small number of our clients, who trade in large sums. Your average investor is (likely) putting a much lower amount into a mutual fund than buying gilts outright. ”
In the first two weeks of 2025, Hargreaves Lansdown recorded the purchase of 6,100 gilts by its customers, the highest fortnight since October. Hargreaves clients have placed £225mn in gilts so far this year, a rise of 123 per cent in the first two weeks of 2024.
“The recent spike in yields, with the 10-year gilt yield approaching 5 per cent, has made the news for early gilts and shown the attractive returns available,” said Sam Benstead, fixed income at investment platform The Interactive Investor.
Active Investor said it saw a 59 percent increase in gilt sales in the first two weeks of January 2025, compared to the same period last year. But it said “the increase in gilt purchases has been steady over the past year – not a complete jump in January alone”.
Savers have flocked to low-coupon gilts to take advantage of the CGT relief, said Dan Coatsworth, investment analyst at AJ Bell.
Low-coupon bonds deliver less of their returns as taxable coupon payments – instead, most of the returns come in the form of capital growth, which is tax-free. Bonds have become “popular among people who want to buy gilts at a discount and sell them when the price rises”, Coatsworth said.
Those who bought the low-cost coupons were likely to be “high-income earners who are likely to use their £20,000 (tax-free) Isa”, he added. “Purchasing funds from a commercial account is attractive to many people in this situation because it is one of the ways to protect any income from the taxpayer. . . You can sell whenever you want as opposed to holding gilts in retirement where you have age-related restrictions on withdrawals.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantage of low-yielding gilts should not discourage investors from buying high-coupon products. “They have the same absolute yields as low coupon (bonds) with the same maturity date, but higher coupons have more returns in the form of income than capital gains. For some investors this may be more appropriate, depending on their individual circumstances and tax position, and whether they are buying a tax-deductible cover or a non-deductible account.”
Some old gilts seem to be popular. TG61, a bond with a coupon rate of 0.5 per cent maturing in 2061, topped Hargreaves Lansdown's list of most-bought gilts and was ranked second in Interactive Investor's list.
TG61 is highly sensitive to interest rates due to its long maturity date, and its price has fallen significantly as gilt production has increased.
Benstead said “the appearance of the overbought list shows that some investors are taking a bet that interest rates will fall more than the market expects, which could cause a big rally in the price of gilts.”
Investors can gain exposure to gilts by buying exchange-traded funds or funds that invest in gilts, but to gain CGT relief they must buy the gilts directly – either at auction or on the secondary market. The easiest way to access them directly is to buy them on the London Stock Exchange, “directly through (investment) platforms and banks,” says Cook, of Hargreaves Lansdown.
Additional reporting by Ian Smith