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Buying gilts?

11 replies

trikkledown · 12/04/2024 06:50

This is from this morning's FirstFT (a daily email I get from my Financial Times subscription):

"Investors have piled into UK government bonds this year to lock in attractive yields as the Bank of England has kept interest rates at a 16-year high.
Hargreaves Lansdown, the UK’s largest do-it-yourself investment platform, said gilt purchases in the first three months of 2024 were three times higher than the same quarter last year, with gilts “by far and away” its most popular fixed-income product, according to Tom Lee, the company’s head of trading. 
Interactive Investor, the second-largest DIY platform, said gilts had attracted more cash than any other investment for 10 straight months, while AJ Bell said four of its top 10 traded securities had been individual gilts so far this year.
When Hargreaves Lansdown experienced the first maturity of a gilt that was widely owned on its platform last year, “we saw a significant percentage of clients reinvesting back into other gilts”, said Lee, demonstrating the continued appeal of a security that before 2022 was often plagued by unappealing yields.
Analysts said a growing conviction that bond yields were likely to stay “higher for longer” was also pulling investors into other corners of fixed-income markets, a trend they expected to continue."

All I know about gilts is that they are investments in Government debt ... basically loaning the Government money .. and that they are considered a relatively safe investment.

Do you invest in them? If so, what is your rationale? Is there a direct relationship between "gilt yields" and national interest rates, i.e. are the gilts popular at the moment because interest rates are high?

Do they have to be kept for a fixed term, or can they be bought and sold like shares? What factors do you consider when choosing one gilt fund over another?

If buying them now, would I be too "late to the party" to benefit? i.e. Are they like shares where piling in on the back of an upwards trend is naive?

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seekingasimplelife · 12/04/2024 19:51

It’s a bit long winded to explain, but I’ll take a shot in very simplified terms…

Bonds have a twice annual payout called ‘the coupon’. This is the interest paid out on the bond. It is set on issue (unless the bonds are index linked to inflation).

Suppose you bought a 5 year bond on issue for £100 face value, with an annual interest payment of 3%. Holding the bond to maturity you would receive £3 each year plus your £100 returned after 5 years. Simple enough. And great for those needing a guaranteed income every year who don’t want to take on risky investments.

Now suppose after 2 years you needed to sell your bond because you needed cash. But in the meantime interest rates on savings have risen to 5%. Well obviously no one is likely to swap their 5% savings for 3% bonds. So the bond price has to fall to sell. In fact it would need to fall to £60 per bond for the £3 interest to be equal to 5% of the price.

Along comes a well off investor who’s used up their ISA allowance. They buy the bond at £60. They receive £3 return a year and hold to maturity. But at maturity they will receive the £100 face value back. A capital gain of 67% on their £60 investment.

Now usually investments outside of an ISA attract capital gains tax … but gilts are exempt… so nice profit - no tax (the coupon would be subject to income tax).

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Okayornot · 12/04/2024 20:01

I'd buy government bonds if I had a cash lump sum which I wanted to put somewhere safe so that I wouldn't lose the capital and to receive a predictable income. They are a good place to put tax free cash lump sum on retirement for example.

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trikkledown · 13/04/2024 07:40

Thanks @seekingasimplelife . That is clear.

So "Investors have piled into UK government bonds this year" reflects:

  • High interest rates, expected to stay high for the foreseeable future;
  • People seeking safe havens for cash;


I saw recently that the price of gold is at an all time high too, which I understand to be also related to people looking for a safe haven.

Yet, at the same time, shares have been going up.

Reading between the hazy lines, perhaps many people are crystallising and locking in recent returns in anticipation of another stock market dive on the back of escalation in the Middle East. Or am I reading too much into it?
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Barleypilaf · 13/04/2024 08:04

As @seekingasimplelife explained, a big attraction is that capital gains on a bond are tax-free.

I have bought very specific gilts that were issued when interest rates were almost zero - so have a coupon rate of 0.25%. As interest rates are now much higher, these trade at a price discount to reflect this. So, for example, I can buy gilts for 92p, which will pay £1 in January 2026. This is a guaranteed return which is tax-free.

For me, it is an alternative to a high-interest account.

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AuntieJoyce · 13/04/2024 08:24

I am waiting for my fixed rates to come off this year then I will be doing exactly what @Barleypilaf mentions above. There’s a tax turn as if you invest in a low coupon gilt you are making a capital gain rather than paying interest with no CGT to pay. For individual investors, I think it is this which is driving the demand

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trikkledown · 13/04/2024 08:46

"if you invest in a low coupon gilt"

Where/how do you find these @AuntieJoyce ? Just search for gilts on the usual platforms like Hargreaves Lansdown, or somewhere else?

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AuntieJoyce · 13/04/2024 09:40

Yes they have a page with available gilts to buy. As PP said above there is a current gilt that will pay a coupon of 0.125 which you can buy for about £93 so that would return around 7% in total at maturity, in January 2026. A 7% overall return might be lower than you could get in a high interest savings account, but you wouldn’t be paying say 40% tax on most of it.

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aramox1 · 14/04/2024 05:30

What happens at maturity, if you buy through a broker?

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trikkledown · 14/04/2024 07:42

"A 7% overall return might be lower than you could get in a high interest savings account"

7% sounds high compared to any high street savings account I've seen, but presumably the key word is "overall" because the interest won't compound, yes?

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seekingasimplelife · 14/04/2024 21:19

@trikkledown ‘I saw recently that the price of gold is at an all time high too, which I understand to be also related to people looking for a safe haven.’

I suspect this is due to inflation - as cash loses its value, people look to preserve their wealth in other commodities.

‘Yet, at the same time, shares have been going up.
Reading between the hazy lines, perhaps many people are crystallising and locking in recent returns in anticipation of another stock market dive on the back of escalation in the Middle East. Or am I reading too much into it?’

Some analysts believe the opposite is the case…that high interest rates have encouraged investors to hold off seeking riskier stocks & shares.
Once the interest rates starts to fall significantly, they suggest shares will start to forge ahead due to pent up demand.

Now, wouldn’t it be a coincidence if all that happened just before UK and US elections?🤔

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messybutfun · 15/04/2024 22:03

trikkledown · 14/04/2024 07:42

"A 7% overall return might be lower than you could get in a high interest savings account"

7% sounds high compared to any high street savings account I've seen, but presumably the key word is "overall" because the interest won't compound, yes?

7% for nearly two years is pretty rubbish even after tax

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