Hargreaves Lansdown opens primary gilt markets to retail investors - is it worth backing government bonds?

The investment platform will give retail investors access to gilt auctions with no dealing fees. We have all the details

model standing on top of bond graph
(Image credit: Getty Images)

Investors are set to get access to the primary gilt markets with investment platform Hargreaves Lansdown and will even be able to purchase and hold the bonds for free.

The primary gilt markets have long-been the preserve of institutional investors, with retail customers typically only able to access government bonds through secondary markets.

But in what is described as an industry-first, Hargreaves Lansdown users are to be given access to Debt Management Office (DMO) gilt auctions.

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It comes as high interest rates and volatile equity markets have boosted the attractiveness of gilts, pushing yields higher.

“This is a ‘first’ for retail investors and gives them fair access to gilts in the primary market under favourable terms,” says Tim Jacobs, head of primary markets at Hargreaves Lansdown

“Muted equity markets and higher interest rates have led to a significant rise in client demand for fixed interest products.”

“The conventional auction process for Gilts is designed for institutions and may not be suitable for some retail investors. However, the new process invites retail investors to participate with favourable terms.”

How to access gilts through Hargreaves Lansdown

Investors can already purchase government bonds or gilts on many investment platforms including Hargreaves Lansdown.

But this has typically been limited to the secondary market, meaning investors may not get as good a deal if they had taken part in the initial auction process.

Hargreaves Lansdown says annual gilt trading volumes on its platform are up 315%.

Currently, more than 25,000 clients hold one of the 57 gilts available on the platform.

However, this has only been possible through secondary market purchases

Hargreaves Lansdown has worked with the DMO and Winterflood Securities to let retail investors participate in DMO auctions alongside institutions such as pension funds.

Under the arrangement, investors will be informed about an auction that will be made available through the Hargreaves Lansdown platform.

 The DMO will issue a prospectus for the gilt sale seven days in advance and retail clients will have until 4pm the day before the auction to apply. This means that Hargreaves Lansdown users will have six days to review the prospectus and submit an order.

At the point of application, clients will know the duration and coupon of the government bond.

They will not know the price until applications have closed and the auction has been completed.

It works similarly to an equity initial public offering that investors may be used to, where you are only informed about the price range and only get the actual price once applications close.

Hargreaves Lansdown clients will receive the average accepted price (AAP) which is determined during the auction.

What gilts are on offer?

The first gilt that investors can back will be a 4% Treasury Gilt 2031

The seven-year gilt matures on 22 October 2031.

Investors will still also be able to purchase gilts on the secondary market but would need to pay dealing fees.

How much will it cost to invest in government gilts?

There will be no dealing fees for buying government bonds through the auction process and Hargreaves Lansdown confirmed to MoneyWeek that other sales will have the same terms.

In contrast, you would need to pay dealing fees if you buy gilts on the secondary market.

The gilts can be held in an ISA, which has a 0.45% annual charge capped at £45 for this type of asset. There is also a 0.45% annual fee for a self-invested personal pension, capped at £200 per year. 

Most clients purchase gilts in their fund and share account, says Hargreaves Lansdown, as there is no capital gains tax to pay on these assets.

This means you won’t pay a penny on purchasing the government bond and the capital gains if you hold it until maturity.

There will be dealing fees if you decide to sell.

Is it worth investing in government gilts?

Gilts or government bonds can provide a regular income and ‘safe haven’ for those worried about volatile equity markets.

Yields have improved for new issues as interest rates have increased.

But gilt yields could become less attractive in the future given that many analysts think the base rate has peaked and the Bank of England could cut the cost of borrowing in the coming months.

It is also worth checking the real return you are getting after inflation.

“The good news for gilt investors is that prices have reset to much more reasonable levels and yields look relatively attractive,” says Laith Khalaf, head of investment analysis at AJ Bell.

“There are still risks out there, notably sticky inflation, the UK election, and the potential for a supply glut coming from a combination of quantitative tightening and new issuance.

“However, the risks and returns on offer look far more balanced than they have since the financial crisis.”

Marc Shoffman

Marc Shoffman is an award-winning freelance journalist specialising in business, personal finance and property. His work has appeared in print and online publications ranging from FT Business to The Times, Mail on Sunday and The i newspaper. He also co-presents the In For A Penny financial planning podcast.