UK Retail Investors Flock to Gilts as Yields Surge to 1998 Levels

British retail investors have been buying UK government bonds at an unprecedented pace as bond yields surge to levels not seen since 1998. According to platform data from Hargreaves Lansdown, gilt purchases increased by 34% over the 30 days leading up to August 21. This surge was driven by concerns about the UK government's fiscal deficit and heavy debt issuance globally.

The long-term yields on UK gilts reached 5.83%, a figure that would have seemed implausible just a few years ago when interest rates were near zero. The Bank of England's base rate has since risen, making gilts more attractive to investors. In the US, Treasuries told a similar story with the 30-year yield approaching 5.30%, near a two-decade high.

Many gilts trade at a discount to their face value, particularly those with very low coupon rates issued when interest rates were near zero. This creates a tax-efficient investment opportunity for UK investors, as capital gains on gilts are exempt from Capital Gains Tax. For example, the TN28 gilt offered a yield to maturity of around 4.1% and a post-tax equivalent return of roughly 7.35% for a 45% taxpayer.