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Investors can now invest in newly issued government bonds in the primary market for the first time.
Investment platforms Hargreaves Lansdown and Interactive Investor are the first platforms to announce that they will allow DIY investors to participate in government debt auctions to buy new gilts.
Hargreaves Lansdown says the move is an “important milestone for retail investors” who, until now, could only invest in government bonds on the secondary market.
New bond 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 in the primary market
A surge in demand over the past year has meant Hargreaves Lansdown has seen trading volumes in government securities increase by 315 per cent year on year, as investors flocked to short-term government securities to make the most of higher returns.
The Government made the decision to open the bond market to retail trading while looking for new sources of financing.
Winterflood Securities acts as a government-appointed debt intermediary and will work with brokers on new government bond issues for DIY investors.
> Investing in short-term public debt: This is Money analyzes the pros and cons
How does it work?
Hargreaves Lansdown said the first issue was a seven-year bond with a 4 per cent coupon that matures in October 2031 and customers can buy it with no transaction fees.
Investors will be able to purchase new issues of government securities by participating in the Treasury Debt Management Office’s government securities auctions.
The DMO issued a formal notice yesterday and investors have until 4:00 p.m. next Tuesday, February 27 to register their interest in the auction.
When applying, customers will know the duration of the gilts and the coupon (interest rate).
The auction will take place on February 28 and the price will also be confirmed then.
This is not uncommon and most retail offers do not reveal the price until applications have closed. Some IPOs will only have a price range that may change during the offering period.
“This is a ‘first’ for retail investors and provides them with fair access to primary market bonds on favorable terms,” ​​said Tim Jacobs, head of primary markets at Hargreaves Lansdown.
“Muted stock markets and higher interest rates have led to a significant increase in demand for fixed income products.”
Currently, over 25,000 customers own one of the 57 gilts available at Hargreaves Lansdown.
II offers access to the same auction and the minimum investment is £1,000, with multiples of £100 allowed after that.
John Dobson, director of investment solutions at II, says of the new option: ‘In addition to breaking down barriers to entry, it provides a solid foundation for retail investors to earn good returns with lower risk.
‘By offering early access, investors access the average price and do not have to worry about secondary market movements or the bid-ask spread. Interactive Investor also offers this commission-free.’
Demand for gilts
A sharp drop in the price of UK government bonds following the September 2022 Mini Budget 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-term government securities, with wealth managers and investment platforms seeing demand increase sharply over the past year.
Despite this, just 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: “In early 2024, government bonds have given back some of their gains from the latter part of 2023, but long-term there is likely to be value in the bond market. as inflation continues to rise.” fall.
‘We have certainly seen more private investors coming to us for advice on the role gilts could play in their portfolios. As long as the current economic climate persists, that is a conversation many private investors should have with their advisors.’
Laith Khalaf, head of investment analysis at AJ Bell, says: “While there are no guarantees, bondholders will probably have an easier time now that the bond bubble has burst, and 60/40 fund investors can probably expect too. higher profits.” stability from the fixed interest side of your portfolio.’
For taxpayers on higher tax rates, there is the obvious advantage that capital gains from gilts are tax-free.
For UK investors who buy a security trading below par, the recovery to par – or capital appreciation – is free of capital gains tax.
“If investors believe inflation will stay high for longer, that will be reflected in bond yields staying high as well,” Tricker adds.
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