Stock Market

Retail investors rush into bonds as sell-off sends yields soaring

UK do-it-yourself investors rushed to buy bonds last month, making the most of the turmoil in debt markets that was amplified by Westminster’s planned tax cuts.

Purchases of bonds surged 400 per cent in September compared with a year earlier — matching the popularity of the most-bought single stocks — according to data from Interactive Investor, the second-largest UK DIY investment platform with one-fifth of market share.

The spike in bond-buying shows how the chaos triggered by UK chancellor Kwasi Kwarteng’s “mini” Budget on September 23 has catalysed a major shift in the market landscape, with private or “retail” investors increasingly entering the fray. Bond prices have dropped sharply this year, including large falls last week in UK government debt. This has juiced up the returns investors who buy into the bonds now can receive if they hold to maturity.

“Sophisticated retail investors have been buying gilts [UK government bonds] to take advantage of higher yields following their sharp sell-off after . . . Kwarteng’s “mini” Budget” last week,” said Sam Benstead, deputy collectives editor at Interactive Investor.

The expansive borrowing plans unveiled by Liz Truss’s government, combined with a lack of fiscal forecasts, spooked markets and prompted investors to demand a higher premium to lend to Westminster. The 30-year gilt yield rose by an unprecedented 0.75 percentage points last Monday as its price plunged, reflecting a sharp sell-off that cascaded into other global fixed income markets.

Hargreaves Lansdown, the largest platform in the UK, reported “an increase in investors trading particularly in long-dated gilts” last week before the Bank of England intervened to calm the market on Wednesday, announcing a plan to buy long-dated debt instruments.

British government bonds are still widely considered to be a safe investment, even after the UK was threatened with a credit rating downgrade on Friday by the agency S&P. At current prices, 10 and 30-year gilts pay a yield of around 4 per cent if held to maturity. In January, the benchmark 10-year yield stood at just 1 per cent.

Rachel Winter, partner at wealth manager Killik & Co, said until recently clients “haven’t wanted to invest in bonds because the returns have been pathetic”.

Bonds were often attractive to savers seeking better rates than holding cash, said Winter, or those looking to put aside money to meet an obligation at a fixed point in the future, such as paying children’s school fees.

Interactive Investor said the most popular buys last week were bonds maturing in March 2025, followed by September 2023.

However, Winter warned that it was easy to make mistakes when trying to buy bonds directly.

“I do think you need quite a lot of expertise to buy bonds directly,” she said. “There’s quite a lot of different gilts. The names look quite funny.”

Interactive Investor said UK gilts were available to private individuals in chunks of as little as £100, although direct bond holdings make up less than 1 per cent of average portfolios.

Bonds are more commonly held through funds and are typically included in diversified portfolios as a counterbalance to stocks. Although their yields are still lower than inflation, meaning they deliver a loss in real terms, the rising payments have proved to be appealing.

“It’s not just about diversification or risk management. You can actually earn a return from bonds in a way you couldn’t a year ago,” said Richard Flax, chief investment officer at digital wealth manager Moneyfarm.

But he cautioned that, even if they intended to hold the bond to maturity, investors should still be conscious that prices could fall further as central banks keep battling inflation and they could be forced to crystallise a loss.

“On some level, you have to think about the mark to market risk,” he added.

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