Retail investor interest in UK government bonds, known as gilts, has surged throughout December and into the early part of January. This increase in demand follows growing market volatility, which has left investors seeking safer returns in the bond market.
Concerns over persistent inflation have sparked expectations that central banks will slow down the pace of interest rate cuts in 2025, keeping base rates elevated for longer periods. As a result, government bond markets in both the UK and the US have experienced a sell-off, leading to decreased investor appetite for such debt.
Increased Yields Signal Higher Borrowing Costs for UK Government
The sell-off has caused yields on UK and US government bonds to rise. Yields represent the interest rate paid to bondholders and have directly contributed to higher borrowing costs for the UK government.
Despite this market uncertainty, gilts have remained highly attractive to retail investors. According to AJ Bell, gilts have been the most popular investment choice among its customers so far in 2025. Hargreaves Lansdown has also reported a significant increase in gilt purchases, marking the highest volume of buys since October. In December alone, gilt purchases by Hargreaves Lansdown clients were up by a third compared to the same month in 2024.
Retail Investors Show Growing Appetite for Gilts
Dan Coatsworth, an investment analyst at AJ Bell, pointed out that while bond market sell-offs dominate the headlines, retail investors have shown an increasing interest in gilts. “While there are concerns about the bond market, investors are still keen on gilts,” Coatsworth said.
Last week, the UK Treasury sold £4.25 billion worth of five-year gilts at an average yield of 4.49%. The auction received £12.74 billion in bids, showing strong demand. AJ Bell reported that its customers showed the highest net investment in gilts this year during this auction.
Why Are Retail Investors Flocking to Gilts?
Institutional investors have recently been selling UK and US government bonds, driving down bond prices. However, this drop in prices has made the bonds more appealing, especially to retail investors seeking yields above 4%.
Coatsworth noted that in the US, many investment experts believe that yields on shorter-dated Treasuries exceeding 5% will prompt investors to move their money from equities into government bonds. With the 10-year US Treasury at 4.785% and the five-year note at 4.6%, the shift from stocks to bonds may soon intensify.
Uncertainty Surrounds Long-Term Investment in Gilts
Although bonds are typically considered low-risk, long-term investments, investors in longer-dated gilts may not hold their bonds to maturity. According to Hal Cook, a senior investment analyst at Hargreaves Lansdown, some investors are speculating on price fluctuations rather than locking in yields.
“Investors buying gilts with long maturity dates, such as the 2061 gilt, are unlikely to hold onto them until maturity,” said Cook. He warned that long-term gilt prices could be volatile, especially as yields change over time.
While bonds are generally seen as a secure investment, Cook advised that a buy-and-hold strategy is most appropriate when investing directly in gilts, as it locks in the return at the time of purchase. Despite the market’s volatility, he emphasized that investors in gilts can still benefit from tax advantages, particularly when bonds are held to maturity.
Conclusion
Retail interest in gilts has grown amid the ongoing volatility in the bond markets, driven by inflation fears and rising yields. While the UK government faces higher borrowing costs, gilts have proven to be a popular choice for investors seeking safe, capital-efficient returns. However, for those interested in longer-term investments, caution is advised due to potential price fluctuations.
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