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Consumers poured money into government bonds in the first half of January after a sell-off in UK debt markets sent yields higher and attracted retail investors hoping for tax-free gains.
UK government borrowing costs have risen in recent months as a global bond sell-off coincided with fears that the UK may enter a period of deflation. StagflationPersistently high prices are preventing the Bank of England from cutting interest rates to boost lackluster growth.
Retail investment platforms AJ Bell and Hargreaves Lansdown saw a surge in government bond buying in the first two weeks of this year, with UK 10-year bond yields rising from 3.75 per cent in mid-September to a 16-year high of 4.93 per cent. 100 last week.
But government bonds rose strongly this week after that UK inflation data It opened the door to faster interest rate cuts from the Bank of England, a move that reinforced it US inflation dataWhich brought the yield back to 4.67 percent by Thursday afternoon. Returns move inversely with prices.
Bonds held directly are exempt from capital gains tax (CGT). This means that individual investors who buy bonds trading at a discount to the face value of £100 can receive tax-free returns, either by redeeming the £100 at maturity, or by selling at a higher price than they bought them at. However, regular interest payments made to bondholders, known as coupons, are taxed as income.
AJ Bell said government bonds were its most popular investment product so far this year, but noted that “those who deal in government bonds tend to represent a relatively low number of our clients, and typically deal in larger amounts. Much less in a multi-asset fund rather than buying bonds outright.
In the first two weeks of 2025, Hargreaves Lansdown recorded 6,100 gold purchases by its customers, the highest fortnightly figure since October. Hargreaves clients have invested £225 million in government bonds so far this year, an increase of 123 per cent on the first two weeks of 2024.
“The recent rise in yields, with the 10-year government bond yield approaching 5 per cent, has brought government bond news to the front pages again and demonstrated the attractive yields available,” said Sam Bensted, head of fixed income at investment platform Interactive Investor.
Interactive Investor said it saw a 59 per cent increase in gold sales in the first two weeks of January 2025, compared to the same period last year. But she said that “the increase in government bond purchasing has been consistent over the past year – and it was not a complete jump in January alone.”
Savers have piled into low-coupon bonds to take advantage of CGT relief, said Dan Coatsworth, investment analyst at AJ Bell.
Low-coupon bonds offer lower returns as taxable coupon payments — instead, the bulk of the returns come in the form of capital growth, which is tax-free. The bonds were “popular among people who want to buy government bonds at a discount and sell them when the price rises,” Coatsworth said.
He added that those buying the low-coupon bonds were likely to be “people on high incomes who may have exhausted their (tax-free) Isa allowance” of £20,000. “Buying securities in a trading account is attractive to many people in this situation because it is one way to protect any gains from tax deposits. . . . You can sell whenever you want rather than holding bonds in a pension where you have age-related restrictions on withdrawals.” .
Hal Cook, senior investment analyst at Hargreaves Lansdown, said the tax advantages of low-coupon bonds should not necessarily discourage retail investors from buying higher-coupon products. “They have similar total returns to lower yield (bonds) with a similar maturity date, but higher coupon bonds have a greater return in the form of income rather than capital gain. For some investors, this may be more appropriate, depending on their individual circumstances and tax situation, as well as whether They were buying government bonds in a tax account or non-wrap account.
Some older types of gold have also proven popular. TG61, a bond with a 0.5 percent coupon rate that matures in 2061, topped Hargreaves Lansdown's list of most-bought bonds and ranked second on Interactive Investor's list.
TG61 is highly sensitive to interest rates due to its long maturity, and its price has fallen sharply as gold yields have risen.
“Its appearance on the most-bought list shows that some investors are betting that interest rates will fall more than the market expects, which could cause a significant rise in the price of these bonds,” Bensted said.
Investors can gain exposure to bonds by buying exchange-traded funds or funds that invest in bonds, but to benefit from CGT relief, they must buy the bonds directly – either at auction or on the secondary market. Cook, of Hargreaves Lansdowne, said the easiest way to access it directly was to buy it on the London Stock Exchange, which is “relatively straightforward through (investment) platforms and banks.”
Additional reporting by Ian Smith
