Retail investors in the UK have been gravitating towards gilts and other fixed-income options, driven by the quest for improved returns and reduced risk, according to investment platform AJ Bell.
AJ Bell’s chief executive, Michael Summersgill, said that customers on the platform had increased their investment in UK government bonds by “meaningful” amounts.
He added, “I’ve been here for 16 years, I have not seen gilts and fixed-income products being bought with anything like the volume that we’ve seen.”
At the beginning of July, UK gilt yields reached their highest point since 2008 with the two-year yield surging to 5.5%. However, since then they have subsequently retreated to slightly below 5% following the release of June’s inflation data. The report revealed a larger-than-anticipated decease in headline UK inflation to 7.9% in the 12 months to June – down from 8.7% the previous month.
AJ Bell highlighted UK government bonds among it’s top 10 favoured products over the past period as investors search for attractive yields in a persistently high inflationary environment.
Summersgill also noted that gilts maturing in January 2024 were the single most popular investment product for the platform in Q1 2023.
“People in that uncertain environment were thinking; ‘I don’t want this money sat here doing nothing… but I’m not confident that now is the time for a big equity market play’.”
According to data from Interactive Investor, retail investment in gilts witnessed a staggering 920% rise between April 2022 to March 2023, although it only remained a small proportion of the platforms total trades.
Investors are also benefiting from the tax treatment on gilts, where there is no capital gains tax to pay when the principal is repaid on maturity. If a gilt paying a low coupon is purchased, the tax liability is only relevant for that minor component, with the majority of the profit arising from the bond’s tax-free pull-to-par.
Despite UK gilt yields lingering below their nearly 15-year high, investors appear to be steadfast in their purchase of the bonds to temporarily hold their funds in anticipation of future investment prospects. This trend has been further fuelled by retail banks not passing on the complete interest rate hikes as set by the Bank of England.
Although proof of this is hardly necessary, last week the Bank of England raised interest rates in the UK to 5.25%, whilst HSBC, one of the UK’s largest banks, responded by offering 2.00% AER on their Flexible Saver Account.
For more advice contact Tom Hawken
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