- Short-term fixed income yields currently even higher than they were a year ago – for now at least
- UK 2-year gilt yield is now 4.75% vs 4.6% 30 September 2022 (MarketWatch data)
- US 2-year Treasury yield is 5% today vs 4.2% September 2022 (MarketWatch data)
- July 2023 saw ii’s highest monthly spike to date as bond yields climbed higher.
Over the year following the UK government’s infamous “mini-budget”, demand for direct fixed-income securities has reached new highs in 2023, for now at least. That’s according to data from interactive investor, the UK’s second-largest investment platform for self-directing private investors. The data looks at customer trades by number.
After the sharp market sell-off a year ago, yields, already edging up in response to the rising interest rate environment, were pushed higher, making the asset class interesting again to many. That’s at least as an entry point, since falling bond prices have illustrated that nothing is ever risk-free.
ii customer purchases of direct fixed income and corporate bonds combined were up 779% between September–December 2022 compared to the previous year, although this was from a low base.
Over the past 12 months since the mini budget, that trend has continued, with fixed income/corporate bond purchases up 678% compared to the previous year. Again, it is worth remembering that this was from a low base. But looking at the month-on-month data, there have been some even more pronounced spikes this year as interest rates have continued to edge up.
July 2023 saw ii’s highest number of fixed income/corporate bond trades combined on record, with trades up 2,730% year on year. This came in the same month that the prospect of ‘higher for longer’ interest rates sent global bond yields soaring. And while summer is a traditionally quieter time for markets, August 2023 saw ii’s second highest spike on record, with corporate bond and fixed-income trades up 1,253%.
interactive investor increased its editorial output for customers on bonds in spring/summer 2022 to help investors navigate the often-complicated fixed income market, on the premise that bond markets, sensitive to high inflation and interest rate hikes, had fallen in value and yields had risen, making the asset class more attractive. ii wanted to ensure there is relevant, engaging and responsible content to help customers.
ii has always covered the bond market, but recognised that in a rising interest rate environment there may well be an increase in private investor interest in bonds.
Sam Benstead, Bonds Specialist, interactive investor, explains: “Buying fixed-income securities directly requires a lot of careful research, but the upside is you get the full benefit of yields that can beat cash savings accounts and money market funds, with the flexibility to hold in tax-friendly ISA or SIPP. While the end just might be in sight for UK interest rate rises, for now private investors have been taking advantage of attractive bond yields and locking in an income assuming they intend to hold the bonds to maturity.
“Many will prefer to access fixed income via a professionally managed bond fund. Yields won’t be as tempting yet as they will take longer to feed through, as the fund manager will have likely bought at lower yields on a fixed term. But you spread risk and have the peace of mind of a professionally managed bond fund, whatever the market environment.
“But for now, increasing numbers of self-directing private investors are turning to direct bonds, erring towards gilts set to mature soon with low coupons, meaning that most of the return on the bond comes from capital appreciation on maturity, which is tax efficient as gilts are free from capital gains tax.
“We offer the whole of market of gilts available to retail investors. Where not available to trade online due to pricing issues, we will honour the online rate for phone deals. There is no minimum investment as such, because different bonds will have different nominal sizes. But a trade as low as £25 wouldn’t be unusual.”
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