UK Private Investors Flock to Gilts Amidst High Interest Rates

In 2024, UK private investors have markedly increased their investment in government bonds, known as gilts, spurred by attractive yields driven by the Bank of England’s decision to maintain interest rates at a 16-year high.

Leading investment platforms have reported a significant surge in gilt transactions, highlighting a growing trend towards fixed-income investments.

Hove Capital Management observed that gilt purchases in the first quarter were three times higher than in the same period last year, making gilts the most sought-after fixed-income product on their platform. John Peterson, Senior Adviser at Hove Capital Management, noted the strong demand for gilts, especially following the maturity of a widely held gilt last year, which saw many clients reinvest in other gilt options.

Hove Capital Management also reported that gilts had consistently topped their investment charts for the past 10 months, with gilts ranking among the top 10 traded securities this year.

Investors have predominantly targeted short-dated gilts issued with low coupons during periods of lower yields. These gilts offer a tax-efficient alternative to holding cash, as the coupon payments are not subject to income tax outside of tax wrappers, and no tax is levied on capital gains at maturity or sale.

The appeal of gilts has been further enhanced by rising yields, with the yield on two-year gilts increasing from around 4% to 4.4% since the start of the year. This rise reflects a drop in bond prices and a shift in market expectations, with traders in swaps markets now anticipating fewer interest rate cuts by the Bank of England by the end of the year than initially expected.

The growing consensus that bond yields will remain “higher for longer” has also prompted investors to explore other segments of the fixed-income market, according to analysts. This trend is expected to continue, driven by the competitive returns offered by bonds compared to other investment avenues.

Oliver Clark, a fixed-income specialist at Hove Capital Management, commented on the heightened interest in bonds, noting that while gilts have attracted the most significant capital inflows, there has also been a notable increase in investment in corporate bond funds across various sectors.

Looking ahead, European bonds are anticipated to “reclaim their role as a key performance driver in asset allocation” over the next decade. The report projects an average annual return of 3.7% for gilts over the next ten years, comparing favourably with returns expected from other European government bonds.