(Bloomberg) – Investors are preparing for a flood of retail money to hit the gilt market after a bond redemption in the UK that have become popular with rich Brits looking to reduce their tax bill.
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The £ 36 billion ($ 45 billion) bond that matures on Friday has an unusually low coupon and offered higher effective gains than savings accounts to rich private investors, thanks to Quirk in UK tax policy. It became the most popular gilt for retail traders.
Investors will probably roll much of the redemption cash into other low coupon gilts that mature in the coming years, according to RBC capital market strategists including Megum Muhic. Two such warrants maturing in 2026 made the two swelling on Thursday before the redemption.
“A lot of cash is about to be deposited into customer accounts and could be looking for a new home,” said Sam Benstead, a fixed income lead at Interactive Investor, an investment platform with over £ 70 billion in administration assets. “The timing is good for investors who want to reinvest this cash into short-term flags, as the product has risen since the summer.”
The Gilt in question was first sold in mid -2021 when the UK economy was recovering after the coronavirus pandemic, the Bank of England's key rate was at the low record 0.1%, and the hope of meaningful financial tightening remained remote. That means that its semi-annual coupon, which the nation's debt management office sets in line with market products at the time of its publication, is just 0.25%.
Low coupon securities appeal to retail investors because, while Banwesi is exempt from capital gains tax, income tax is still supposed to be the coupon income. That means holders can realize larger tax -exempt gains as they gravitate towards their redemption value compared to higher coupon peers.
“These earnings can be significant given the distance from a bar that some of these bonds have traded,” said Moyeen Islam, a rate strategist at Barclays PLC. Friday slipped Gilt 2025 in maturing announced on 100 pence in June 2021 under 90 pence in 2022, before bouncing back to its redemption value.
“Story evidence suggests that retail holdings for some bonds can be remarkably high and the recent sale has seen a high demand from retail investors,” added Islam.
Low coupons also offer benefits to institutional investors due to their higher sensitivity to move in interest rates, allowing funds to more efficiently adjust their portfolio risk. At last week's annual DMO consultations, there have been calls from some market participants to get a greater supply of low coupon securities.