The Notebook: Why everyone’s investing in gilts
Where the City’s top thinkers get a few things off their chest. Today, Victoria Scholar, head of markets at Interactive Investor, takes the pen to talk through the latest trends in the investment world, from gilts and gold to Rent the Runway
Gilts and glamour
Gilts are in vogue at the moment among retail investors. According to Interactive Investor (II) research, the UK government bond TN25 (United Kingdom 0.25 per cent 31/01/2025), has seen the highest net inflows of any investment available among II customers across every month since June 2023. The amount held in this gilt has risen 28-fold since the first quarter of last year.
This bond matures on 31 January 2025 and currently offers an attractive above inflation yield of 4.7 per cent. That’s why this low-risk investment is proving so popular among retail customers, even more so than popular active and passive funds such as Vanguard’s Lifestrategy range or Fundsmith Equity as well as frequently traded shares such as Nvidia, BP and Lloyds, which often featured on II’s monthly most bought list of investments.
Since gilts are bonds issued by the UK government, they are considered a much safer investment than equities given that the government holds a very low default risk, and stocks can often demonstrate much higher levels of volatility.
Gilt yields hit a peak last summer following the Bank of England’s aggressive stream of inflation-combative interest rate hikes which began in December 2021, causing many investors who had previously steered clear of bonds to pay attention. This helped to kickstart flows into the asset class. Investors appear to be treating gilts like short-term savings accounts – picking the maturity date of a gilt that coincides with when they get their cash back.
The Bank of England is likely to start cutting rates at some point in 2024 and this could help push bond prices higher, also boosting the allure of gilts at this time. However, bonds maturing soon will see the smallest uplift to their prices if rates fall.
Another appeal among investors is that gilts have a special tax status: while their coupon income is taxed as income, capital gains are tax-free. Because a large part of the total yield from low coupon gilts issued when interest rates were near zero comes from the capital uplift when the bonds mature, they are a useful tool to pay less tax on investments held outside of tax-efficient wrappers, like SIPPs or ISAs.
All that glitters
Gold surged to a record high on Friday, having gained more than 15 per cent so far this year. The precious metal is enjoying its best start to the year since 2017 driven by demand for safe-haven assets among investors following the escalation of geopolitical instability in the Middle East. Investors are also buying gold as a hedge against inflation. US inflation data last week came in hotter-than-expected in March and other economies are also struggling with above target price pressures.
Fashion baby
Shares in Rent the Runway surged 162 per cent on Thursday in an extremely positive reaction to its fourth quarter earnings and revenue which both surpassed analysts’ expectations. The clothing rental company logged its best weekly performance on record. Before this week, shares have largely been struggling since its IPO in October 2021. The company suffered during the pandemic with the shift to working from home when most in-person events were cancelled. But now there are hopes that the return to the office could help boost demand for workwear alongside formal and party attire.
Recession in the rearview?
The National Institute of Economic and Social Research (NIESR) says a UK recession is now “in the rearview mirror” after UK GDP grew by 0.1 per cent in February and 0.3 per cent in January. It estimates GDP will grow by 0.4 per cent in the first quarter of 2024 and 0.3 per cent in the current quarter. NIESR said “while exiting from the shallow recession in the second half of 2023 is welcoming, these forecasts remain broadly consistent with the longer-term trend of low, but stable economic growth in the United Kingdom.”
Quote of the week
A world in which AI is “kept in the clammy hands of a small number of very, very large and well-heeled companies in California” is “not going to stick”.
Nick Clegg, ex-deputy PM and president of global affairs at Meta
A recommendation
In the latest episode of II’s On the Money podcast, Kyle Caldwell, collectives editor at Interactive Investor, is joined by his colleague Sam Benstead to discuss what they’ve seen in the world of investment in the first quarter of 2024. The pair digest key market trends and topics including the ‘Magnificent Seven’ being rebranded to the ‘Fab Four’, the latest interest rate predictions, the most popular funds and investment trusts among ISA investors, the appeal of India as an investment destination and investment trust discount opportunities.
Coming up in the next episode, Kyle and Sam talk about why one UK gilt has been attracting the highest net flows of any investment available to Interactive Investor customers each month since last summer.