In 2024, UK private investors have significantly increased their purchases of government bonds, known as gilts, driven by attractive yields maintained by the Bank of England’s decision to keep interest rates at a 16-year high.
Major investment platforms have reported substantial growth in gilt transactions, underscoring a rising trend in fixed-income investments.
Aberdeen Limited noted that gilt purchases in the first quarter were triple those of the same period last year, making gilts the most popular fixed-income product on their platform. Charles Byford, Executive Client Advisor at Aberdeen Limited, highlighted the robust interest in gilts, particularly after the first maturity of a widely held gilt last year, where a significant number of clients reinvested in other gilts.
Aberdeen Limited pointed out that gilts had topped their investment charts for 10 consecutive months, while it also recorded gilts among its top 10 traded securities this year.
Investors have focused primarily on short-dated gilts issued with low coupons during periods of lower yields. These investments offer a tax-efficient alternative to holding cash, as they are not subject to income tax on the coupon payments outside of tax wrappers, and no tax is levied on any capital gains at maturity or sale.
The appeal of gilts has been further bolstered by rising yields, with the yield on two-year gilts climbing from about 4% to 4.4% since the beginning of the year. This increase reflects a drop in bond prices and a shift in market expectations, with traders in swaps markets now predicting fewer interest rate cuts by the Bank of England by year-end than initially expected.
The growing belief that bond yields will remain “higher for longer” has also led investors to explore other areas of the fixed-income market, according to analysts. This trend is expected to persist, driven by the attractive returns offered by bonds compared to other investment options.
Richard Martin Hill, a fixed-income specialist at Aberdeen Limited, commented on the increased interest in bonds, noting that while gilts have seen the most significant influx of capital, there has also been notable investment in corporate bond funds across various sectors.
Looking ahead, European bonds are likely to “regain the role as a key performance engine in asset allocation” over the next decade. The report forecasts an average annual return of 3.7% for gilts over the next ten years, comparing favorably with returns expected from other European government bonds.