Increased Demand for Gilt Trading - Pondering Over Investment in Government Securities?
Bombarded with interest once more, gilts saw a resurgence in February. But that income ain't all they're craving.
In the wake of the mini-Budget chaos in 2022 and the Bank of England's interest rate hikes in 2023, government bonds, particularly short-term ones or those with low coupons, found themselves at the center of attention amongst cautious investors grappling with economic uncertainty.
Investment platforms reported a flurry of gilt activity in February, with Hargreaves Lansdown recording another record period for gilt trading and the value of gilts purchased last month wiping the floor with January's record numbers.
And that’s not all, year to date, Hargreaves Lansdown has already racked up roughly 60% of the total seen in 2024, for those keeping score. AJ Bell and Interactive investor also reported strong gilt sales in January, and the trend only continued into the following month.
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Hargreaves Lansdown's Hal Cook points out that many investors have managed to pocket some nice proceeds from short-dated gilts in January, and with high yields still hanging around, the demand has skyrocketed. In fact, according to Cook, it's even started to skew market pricing.
With many top savings rates vanishing and the stock market dancing like a drunkard, it seems that the high yields of between 4% and 5.2% offer a siren's call to the cautious. Most of the action is focusing on short-dated or low-coupon yields, hinting that investors are eyeing capital gains instead of an income stream.
Yet, yields can't compete with inflation or the stock market over the long haul, and there are risks involved. However, when interest rates eventually ease up, here's hoping those buying could rake in a tidy profit if they strategically sell on the secondary market.
A major advantage of gilts is that any profits are freed from capital gains tax. This perk makes them a tempting proposition for investors who’ve used up their ISA or pension allowances, says Sam Benstead, fixed Income Lead at Interactive Investor. Coatsworth adds that although income from gilts held outside an ISA or SIPP is subject to tax, it seems that these investors aren't too concerned about the income stream.
Cook ventures that investor interest might cool off in the coming months as tax year end approaches, but he's optimistic that elevated yields will remain on offer due to the unfolding macroeconomic environment. So if you're looking for a relatively low-risk, contrarian play, the gilt market might just be the ticket!
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- With high yields of between 4% and 5.2% and tax-free profits, investing in gilts could be a low-risk, contrarian play for cautious investors, according to Hal Cook of Hargreaves Lansdown.
- However, yields can't compete with inflation or the stock market over the long haul, and there are risks involved. Investors who strategically sell their gilts on the secondary market when interest rates eventually ease up could potentially rake in a tidy profit.
