Interactive Investor

Gilt attracts more cash than any other investment for 10 straight months

Investors are drawn to the high yield and tax break, new interactive investor data shows.

4th April 2024 11:47

by Camilla Esmund from interactive investor

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Investment fund flows 600

UK government bond (gilt)UNITED KINGDOM 0.25 31/01/2025 (LSE:TN25), has seen the highest net flows of any investment available to interactive investor (ii) customers each month since June 2023.

The amount held in this gilt has risen 28-fold since the first quarter of 2023. The bond was issued in summer 2021 before interest rates began to rise, yielding just 0.28% at the time, according to Refinitiv.

UNITED KINGDOM 0.125 30/01/2026 (LSE:T26) and UNITED KINGDOM 1 22/04/2024 (LSE:TG24) have also been popular, with the gilts regularly featuring behind TN25. 

Gilts maturing soon and with low coupons are attracting more cash than popular active and passive funds, such as Vanguard’s LifeStrategy range or Fundsmith Equity, as well as in-vogue shares such as NVIDIA Corp (NASDAQ:NVDA), BP (LSE:BP.), and Lloyds Banking Group (LSE:LLOY) – familiar names which often feature on interactive investor’s monthly most-bought list of investments.

Why investor interest in gilts is heating up

Gilts are bonds issued by the UK government and hold next-to-no default risk. They pay two coupons a year and a £100 principal on maturity. The annual coupon on TN25 is 25p, split into two payments.

Traded on secondary markets, yields changes as the market price of gilts change, linked to investor views on factors like the economy and UK government policy. The coupon is fixed for the life of the gilt, unless it is an inflation-linked gilt.

Yields on the three most-popular gilts, assuming they are held until maturity, are currently 4.7% (TN25), 4.2% (T26) and 5% (TG24), according to Refinitiv. The bonds mature on 31 January 2025, 30 January 2026 and 22 April 2024.

Gilts have a special tax status: while their coupon income is taxed as income, capital gains are tax-free. Because a large part of the total yield from low coupon gilts issued when interest rates were near zero comes from the capital uplift when the bonds mature, they are a useful tool to pay less tax on investments held outside tax-efficient wrappers, such as SIPPs or ISAs.

Explaining further, Sam Benstead, fixed income specialist at interactive investor, says: “It may surprise many to see that it is not a popular fund, investment trust, ETF, or share that has been attracting the most cash since last summer. But it makes a lot of sense that TN25, alongside other gilts maturing soon, have seen a huge amount of cash flow into them.

“First, gilt yields hit a recent peak last summer, at around 5%, causing many investors who had steered clear of bonds to pay attention. That kickstarted flows into the asset class.

“Combined with tax benefits due to low coupons, there were and still are good low-risk returns on offer for investors who have maxed out their ISAs and have cash they want to lock away for relatively short periods.

“Even inside an ISA or a SIPP, getting around more than 4% annualised from a safe source like the UK government is appealing for many investors. It suggests that investors are treating gilts like short-term savings accounts – picking the maturity date of a gilt that coincides with when they to get their cash back. They then have plenty of other low-coupon bonds maturing soon that they can reinvest their cash into.

“While holding a gilt to maturity effectively locks in a return, the price of the bond will fluctuate until it matures, which may lead to a paper loss or gain. This is an added layer of complexity when owning gilts as a cash-proxy that a savings account does not have, so investors should always do their own research and make they understand how gilts work before investing.”

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Please remember, investment value can go up or down and you could get back less than you invest. If you’re in any doubt about the suitability of a stocks & shares ISA, you should seek independent financial advice. The tax treatment of this product depends on your individual circumstances and may change in future. If you are uncertain about the tax treatment of the product you should contact HMRC or seek independent tax advice.

Important information – SIPPs are aimed at people happy to make their own investment decisions. Investment value can go up or down and you could get back less than you invest. You can normally only access the money from age 55 (57 from 2028). We recommend seeking advice from a suitably qualified financial adviser before making any decisions. Pension and tax rules depend on your circumstances and may change in future.

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