Investors are now able to invest in newly-issued gilts on the primary market for the first time.
Investment platforms Hargreaves Lansdown and Interactive Investor are the first platforms to announce they will allow DIY investors to participate in government debt auctions to purchase new gilts.
Hargreaves Lansdown says the move is a ‘significant milestone for retail investors’ who, until now, were only able to invest in gilts on the secondary market.
New gilt issues have generally been limited to institutional investors and tend to be launched at slightly discounted prices through auctions.
Unlocked: Investors will now be able to access new issues of gilts on the primary market
A surge in demand over the past year meant Hargreaves Lansdown has seen gilt trading volumes pick up by 315 per cent year on year, as investors piled into short-dated gilts to make the most of higher yields.
The Government made the decision to open up the gilts market to retail trading as it seeks new sources of financing.
Winterflood Securities acts as the Government-appointed debt dealer and will be working with brokers on new issues of gilts to DIY investors.
> Investing in short-dated gilts: This is Money looks at the pros and cons
How does it work?
Hargreaves Lansdown said that the first issue was a seven-year gilt with a 4 per cent coupon maturing in October 2031 and and customers can buy it free of dealing charges.
Investors will be able to buy new issues of gilts through participating in the Treasury’s Debt Management Office’s gilt auctions.
The DMO issued a formal notice yesterday and investors have until 4pm next Tuesday, 27 February to register their interest in the auction.
When they apply, customers will know the duration of the gilts and the coupon (interest rate).
The auction will take place on 28 February and the price will also be confirmed then.
This is not uncommon and most retail offers do not disclose a price until applications have closed. Some IPOs will only have a price range which can change during the offer period.
‘This is a “first” for retail investors and gives them fair access to gilts in the primary market under favourable terms,’ says Tim Jacobs, Hargreaves Lansdown’s head of primary markets.
‘Muted equity markets and higher interest rates have led to a significant rise in demand for fixed-interest products.’
Currently, more than 25,000 customers hold one of the 57 gilts available on Hargreaves Lansdown.
II is offering access to the same auction and the minimum investment is £1,000, with £100 multiples allowed after that.
John Dobson, head of investment solutions at II, says of the new option: ‘Other than breaking down the barriers of access, it provides a solid foundation for retail investors to gain good yields at lower risk.
‘By providing early access, investors get in at the average price and do not have to worry about secondary market movements and the spread on buying and selling. Interactive Investor also provides this commission-free.’
Demand for gilts
A sharp fall in the price of UK government bonds following the Mini Budget of September 2022 and continued volatility since then has seen private investors increasingly shy away from domestic debt.
But towards the end of 2023, investors rushed to invest in short-dated gilts, with wealth managers and investment platforms observing demand going up dramatically over the past year.
Despite this, only 0.2 per cent of gilts are now held by UK retail investors, ONS data shows.
Andrew Tricker, director at Lubbock Fine Wealth Management, says: ‘The start of 2024 has seen gilts give back some of their gains of the last part of 2023 but over the longer term there’s likely to be value in the gilt market as inflation continues to fall.
‘We’ve certainly seen more private investors coming to us for advice on the role gilts might play in their portfolios. As long as the current economic climate persists, that’s a conversation a lot of private investors should be having with their advisers.’
Laith Khalaf, head of investment analysis at AJ Bell says: ‘While there are no guarantees, gilt holders are likely to have a smoother ride of it going forward now the bond bubble has popped, and 60/40 fund investors can probably likewise expect greater stability from the fixed interest side of their portfolio.’
For higher rate tax payers, there is the obvious advantage that capital gains from gilts are free of tax.
For UK investors who buy a gilt that is trading below par, the recovery back to par – or capital appreciation – is free of capital gains tax.
‘If investors believe inflation is going to stay higher for longer that will be reflected in gilt yields staying high too,’ Tricker adds.
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