Consumers poured money into gilts in the first half of January after a sell-off in the U.K. bond market pushed yields higher and attracted retail investors hoping for tax-free gains.
The British government's borrowing costs have risen in recent months amid a global bond selloff and concerns that Britain could enter a period of stagflation, with persistently high prices preventing the Bank of England from cutting interest rates to boost sluggish economic growth.
UK gilt buying by retail investment platforms AJ Bell and Hargreaves Lansdown surged in the first two weeks of this year, with the UK 10-year bond yield rising to a 16-year high of 4.93 pounds from 3.75% in mid-September. Last week.
But gilts rose this week after UK inflation data opened the door for faster rate cuts by the Bank of England, while US inflation data reinforced the move, with gilt yields back up to 4.73% by Thursday afternoon. Yield is inversely proportional to price.
Gilts held directly are exempt from Capital Gains Tax (CGT). This means that a retail investor who buys a gilt at a discount to the face value of £100 can receive a tax-free return by redeeming the £100 at maturity or selling it at a higher price than the purchase price. However, periodic interest payments (called coupons) paid to bondholders are taxed as income.
AJ Bell said gilts were the most popular investment product so far this year, but noted that "customers trading gilts tend to represent a relatively small number of our clients and typically trade larger amounts. Ordinary investors are more likely to Put less money into multi-asset funds rather than buying gilts outright.”
Hargreaves Lansdown customers bought 6,100 gilts in the first two weeks of 2025, the highest fortnightly volume since October. Hargreaves clients have put £225m into gilts so far this year, a 123% increase on the first two weeks of 2024.
Sam Benstead, head of fixed income at investment platform Interactive Investor, said: “The recent surge in yields, with the 10-year Treasury yield approaching 5%, has once again made Treasuries headlines and demonstrated what is available. Attractive returns.”
Interactive Investor said gilt sales rose 59% in the first two weeks of January 2025 compared with the same period last year. But it said "growth in gilt buying has been steady over the last year - without a full jump in January alone".
AJ Bell investment analyst Dan Coatsworth said savers were rushing into low-interest gold Treasuries to take advantage of capital gains tax exemptions.
Low-coupon gold Treasuries provide less return in the form of taxable coupon payments; instead, most of the return comes in the form of capital growth, which is tax-free. Coatsworth said the bonds were "popular with those who want to buy gilts at a discount and sell them when prices rise".
He added that those buying low-interest gold gilts could be "higher earners who may have used up their £20,000 (tax-free) Isa allowance". "In this context, buying gilts through a trading account is attractive to many people as it is a way of protecting the taxman's gains... You can sell at any time rather than holding them in a pension UK gilts because there are age-related limits on pension withdrawals.”
Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantages of low-coupon gold Treasuries would not necessarily deter retail investors from buying high-coupon products. “Their overall yields are similar to low-coupon (bonds) with similar maturities, but higher-coupon gilts have more return in the form of income rather than capital gains. For some investors, this is may be more suitable, depending on their personal circumstances and tax position, and whether they buy gilts in a tax wrapped account or an unwrapped account."
Some long-term gilts have also proven popular. TG61, a 0.5% coupon bond due in 2061, tops Hargreaves Lansdown's list of the most bought Treasuries and ranks second on Interactive Investor's list.
TG61 is highly sensitive to interest rates due to its long maturity, and its price fell sharply as Treasury yields rose.
Bensted said the bond's "appearance on the most bought list suggests that some investors are betting that interest rates will fall more than the market expects, which could lead to a sharp rise in the Treasury's price."
Investors can gain exposure to gilts by buying exchange-traded funds or funds that invest in gilts, but to benefit from the capital gains tax exemption they must buy gilts directly - either at auction or on the secondary market superior. The easiest way to access them directly is to buy them on the London Stock Exchange, which is "relatively simple through (investment) platforms and banks," said Hargreaves Lansdown's Cook.
Additional reporting by Ian Smith