Retail investor interest in gilts, UK government bonds, surged in December and early January, as turbulence in the bond market prompted a shift towards safer investments. The increase in demand comes as fears of persistent inflation have led to expectations that central banks will slow the pace of interest rate cuts, resulting in prolonged high base rates. This shift in market dynamics triggered a sell-off in government bonds in both the UK and US, dampening investor appetite for such debt.
However, despite the volatility in the bond market, gilts have become a favored investment choice among retail investors, with platforms like AJ Bell and Hargreaves Lansdown reporting significant upticks in demand.
Strong Retail Demand for Gilts
AJ Bell noted that gilts have been the most popular investment choice for its customers so far in 2025. Hargreaves Lansdown also observed a notable rise in gilt purchases, with the number of purchases in December increasing by a third compared to the previous year.
Dan Coatsworth, investment analyst at AJ Bell, pointed out that while the media focuses on the sell-off in bonds, retail investors are increasingly turning to gilts as they become more attractive with higher yields. Recently, the UK Treasury successfully sold £4.25bn worth of five-year gilts, attracting £12.74bn in bids. The demand was particularly high on AJ Bell’s platform, with gilts garnering more net flow than any other investment so far this year.
The Appeal of Higher Bond Yields
Government bond yields, which represent the return paid to investors, have risen due to a sell-off by institutional investors. These rising yields are making bonds more appealing, especially for retail investors seeking to lock in yields above 4%. Coatsworth explained that a widely held belief among investment experts is that yields surpassing 5% on shorter-dated US Treasuries could trigger a significant shift of funds from equities into government bonds.
Currently, yields on US government bonds are approaching this level, with the 10-year Treasury at 4.785% and the five-year note at 4.6%. Longer-dated Treasuries have already surpassed the 5% threshold, making them an attractive investment option for those seeking higher returns.
Speculative Interest in Long-Term Gilts
While bonds are traditionally considered a low-risk, long-term investment, some retail investors are speculating on the price movements of longer-dated gilts. Hal Cook, Senior Investment Analyst at Hargreaves Lansdown, noted that investors buying long-term gilts, such as the 2061 gilt, are unlikely to hold them until maturity. The volatility in the prices of long-dated bonds, which move inversely to yields, creates opportunities for short-term speculation.
However, Cook advised that investors looking for stability and predictable returns are better off with a “buy and hold to maturity” strategy. This approach locks in returns at the point of purchase, making it a more reliable way to benefit from government bonds. He also pointed out that gilts are tax-efficient for capital gains when held to maturity, especially once ISA allowances have been used up.
Ongoing Market Volatility
The bond market is expected to remain volatile in the short term, but the higher yields on gilts continue to attract attention from retail investors looking for safer investments during times of economic uncertainty. As inflation concerns persist and central banks adjust their monetary policies, gilts are likely to remain a key focus for investors seeking stable returns amidst market fluctuations.
Related topics:
