Short-term UK government debt is proving popular among investors, lured by potential tax-free gains in a relatively safe asset, data suggests.

A growing number of DIY investors also appear to buying UK treasury bills, with durations of just three and six months, targeting higher yields than offered by most savings account and without long lock-up periods.

The so-called T26, T26A and TN28 gilts, which mature in January 2026, October 2026 and January 2028, respectively, were among the top ten assets bought by Hargreaves Lansdown platform investors last week.

The T26, which has a 0.125 per cent coupon and costs around £98 to buy, was in the 10 most popular assets among Interactive Investors in the 25 to 34, 35 to 44, and 45 to 54 age categories in the first quarter of the year.

Investors are buying gilts with low interest rates that mature soon for less than face value, as they can pick up their full value when they are redeemed and bank capital gains tax-free.

Retail investors are buying short-term gilts for their tax-free profits

Interactive Investor said the T26, which has a yield-to-maturity of 3.15 per cent, has proved popular since T25 matured earlier the year after being heavily bought in the previous quarter.

Sam Benstead, II’s fixed income lead, added: ‘Investors have rolled money into another low-coupon gilt, maturing soon, to take advantage of the tax break on offer and guaranteed return.

‘Gilts are not subject to capital gains tax, so when bought at a discount and maturing at £100, the gain is tax free if held outside of an Isa or a Sipp.

‘Coupons are taxed as income, however, but because T26 was issued in May 2020, when interest rates were close to zero, most of the return now comes from capital uplift not income.’

Hal Cook, senior investment analyst at Hargreaves Lansdown, highlighted the ‘safe haven’ pull of gilts since Trump launched his ‘liberation day’ trade tariff bombshell at the end of March.

He added: ‘Gilts with shorter periods of time until they mature [are particularly popular] as the potential for losses is usually lower.

‘For investors who have lots of money in the stock market and are worried about the implications of tariffs on company earnings over the short-term, parking money in short-dated government bonds can be an appealing option.’

Longer term gilts have seen yields fall over the last month as bonds have proved an alternative to volatile equity markets and interest rate expectations have changed.

Three different gilts were among the most purchased assets on Hargreaves Lansdown last week 

But while two-, five- and 10-year gilt yields are down 6, 7 and 10 basis points, respectively, over the last month, analysts point to uncertainty in the UK’s economic outlook.

The BlackRock Investment Institute is neutral on UK gilts, but currently holds them alongside US government bonds in preference to peers.

It said in a note: ‘Gilt yields are off their highs, but the risk of higher US yields having a knock-on impact and reducing the UK’s fiscal space has risen. We are monitoring the UK fiscal situation.’

Tom Hibbert, multi asset strategist, Canaccord Wealth, added: ‘Short-dated gilts are relatively immune from the macro backdrop as the opportunity will persist so long as yields remain elevated.

‘As part of our broader investment strategy and related to the gilt market more generally we see continued value, supported by attractive valuations and potential diversification benefits. 

‘The Bank of England is gradually progressing with rate-cuts which should provide support for gilts.

‘That said, longer-dated gilts do come with increased sensitivity to interest rate movements and are more exposed to the UK’s weak fiscal backdrop, for this reason we are more cautious of long-dated gilts.’

T-bills now a retail trade?

Platform RetailBook, which claims to be the only platform offering retail access to Treasury bills, has seen £130million of T-bill buying activity over the last two months.

T-bills, the market for which is traditionally dominated by very large investors, are not capital gains exempt but still provide investors tax efficiency as they can be held in a Sipp or Isa.

RetailBook head of fixed income Stacey Parsons said T-bills can be more appealing to everyday investors as the capital gains benefits of gilts are more applicable to high-net-worth individuals.

She said of the roughly 10,000 individual buyers on the RetailBook platform over the last two months, who face a minimum purchase of £1,000 but bought around £18,000 on average, 75 per cent have cited tax efficiency.

Perhaps more appealing though are yields of around 4 per cent, compared to a cash and savings market currently offering closer to 2 per cent, as well as a short-term, liquid and relatively low risk destination for capital during market volatility.

Parsons said: ‘T-bills can offer retail investors institutional returns without having to lock up their money for long periods.’

Nick Smith, managing director for capital markets, added: ‘With UK interest rates back up to normal long-term levels, there’s a huge need for retail investors to access institutional rates of returns for their savings – something that RetailBook has enabled via our unique UK Treasury Bill offering. 

‘Over the last two months alone we have seen £130million of investor demand, often using tax-efficient ISA’s and SIPPs, demonstrating the natural demand that exists from retail investors for democratided access across all primary markets.’

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