Investors flocked to gilts again in February but it is not just the income they are searching for.
Government bonds, particularly short maturity or low coupon gilts, have been popular since the aftermath of the mini-Budget in 2022 and also as the Bank of England hiked interest rates in 2023.
The asset class has provided comfort for cautious investors amid economic uncertainty since the start of the year and investment platforms reported a busy month for gilt purchases in February.
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Hargreaves Lansdown recorded another record period for gilt trading last month.
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The investment platform said the value of gilts purchased in February was 63% higher than those traded in January, which was another record month.
Looking at total net buys year to date, until close on 12 March, the platform said it has already reached about 60% of the total seen in 2024.
AJ Bell also recorded gilts as the most popular asset class in January, and more money flowed into gilts during February.
Interactive investor said gilt purchases as a proportion of assets on the platform are around the highest they have ever been. Its annual figures for February show a 42% jump in trades and 65% increase in the amount of money added to gilts.
Why is gilt demand rising?
There are a few factors behind the surging interest in gilts.
Research by asset manager Aberdeen recently highlighted that £80 billion of short-dated gilts are set to expire in the first six months of 2025, prompting investors to looking for somewhere else to park their money.
Hal Cook, senior investment analyst at Hargreaves Lansdown, said many investors had big proceeds from short-dated gilts in January and with high yields still available, he said this is pushing up prices.
Cook said: “Some managers even noted the higher demand for low coupon gilts, particularly in early February, was distorting market pricing.
“For fund managers to be talking about this highlights the volume of these gilts that retail clients are buying, in a market that has historically been dominated by institutional investors.”
While many of the best savings rates are disappearing and stock markets are volatile, cautious investors seem to be attracted to the high yields of between 4% and 5.2% on offer.
Much of the focus is around short-dated or low-coupon yields, which experts suggest means investors were looking to make capital gains rather than buy them for income.
Dan Coatsworth, investment analyst at AJ Bell, said: “Interest rate expectations significantly impact gilt yields and investors buying low coupon gilts are effectively taking the view that interest rates will fall. If they’re correct, gilt yields would typically come down and gilt prices would go up.”
Should you buy gilts?
There are risks to gilts as yields won’t beat inflation or the stock markets over the long-term.
But once interest rates eventually fall again - as expected - and bond prices go up, gilt investors could make a nice profit if they can sell on the secondary market.
This raises one of the main advantages of gilts as any profits are free of capital gains tax.
Sam Benstead, fixed Income Lead at Interactive Investor: “This makes them a very attractive investment for anyone who has filled up their ISA or pension allowances, which is why we see most gilts held in general investment accounts.”
Coatsworth added: “You don’t pay any capital gains tax when selling gilts for a profit, making them particularly attractive to individuals who might have used up their ISA allowance and are looking for ways to minimise handing over investment gains to the taxman.
"Tax is still payable on any income from gilts held outside an ISA or SIPP, yet investors buying low-coupon gilts are clearly not selecting them for their income stream.”
Cook suggests gilt demand could tail off next month though, adding: “We’d naturally expect demand to fall from the levels we’ve seen so far in 2025, particularly once we pass tax year end, when early bird investors will choose to make use of their tax allowances for 2025/26 ahead of investing in gilts.
"But we would expect gilt yields to remain elevated given the macroeconomic environment.”
