What caught my eye this week.
Remember last summer when I pondered whether an army of everyday investors – led by a legion of cash-rich city boys – had gobbled up so much of the low-coupon Treasury 2061 gilt that it was distorting the yield curve?
Readers steeped in the UK government bond market opined in the comments. I’d say the conclusion was “hmm, maybe a little bit.”
Well this week The Bank of England published data showing that at the other end of the spectrum – the ultra-short end, where gilt issues will mature in a year or two – retail investors are definitely driving the bus. At least when it comes to the low-coupon issues.
Gilt-edged investing
Reminder: capital gains on gilts are free of capital gains tax. You only pay tax on the income component of your total return.
As The Accumulator explained to members, this means that holding short duration low-coupon gilts can deliver higher after-tax returns than cash for investors with a lots of spare change outside of tax shelters.
A graphic from the Bank of England illustrates the difference:
Source: Bank Underground
For an investor who has filled up their ISAs (and perhaps maxed out on premium bonds) this tax treatment makes short duration low-coupon gilts much more attractive than cash savings, where only a small tax-free savings allowance shields your interest income from HMRC. Especially at the higher income tax rates.
It’s not surprising then that the Bank of England’s data shows ‘retail’ investors (individuals like you and me) own huge swathes of ultra-short low-coupon gilts:
Source: Bank Underground
Roughly 80% of the free float 1 of that low-coupon Treasury 2026 gilt is held by retail investors.
Compare that to the intermediate and long duration gilts. Here retail participation is far lower.
By comparison the shortest end of the gilt market is now an ordinary investors’ playground.
Millions of people or millions of pounds…
Of course ‘ordinary’ doesn’t necessarily mean your mum owns some.
There could be a relatively small number of cashed-up oligarchs whose wealth advisers moved their millions into ultra-short duration gilts, as opposed to it being the latest hot thing for Joe Public.
I first wrote about the tax advantages of low-coupon gilts back in January 2024. I wouldn’t say the response was rabid.
My co-blogger’s typically in-depth explanation did garner a bit more interest. But I suspect that after 2022, some readers just hear the word ‘bond’ and shudder.
Well if you have a lot of unsheltered cash sitting around getting taxed then consider this your wake-up call.
Finally, the Bank’s holding data does shed more light on Treasury 2061, revealing that retail investor involvement here is actually very small.
That doesn’t mean the particular attractions of Treasury 2061 aren’t distorting the yield curve. But it does suggest that it’s institutions (hedge funds and the like) who are driving that train.
Have a great weekend!
From Monevator
Asset allocation quilt: winners and losers over the last 10 years – Monevator
Funding childcare: how to navigate a complex system – Monevator
From the archive-ator: Ten ways to be a terrible investor – Monevator
News
Returns on uninvested cash in shares ISAs could be charged 22% – This Is Money
UK economy grew 0.3% in November, beating forecasts – BBC
It’s a buyers market, as homes for sale reach an eight-year high – This Is Money
Scotland is introducing a mansion tax for £1m homes – Property Industry Eye
The UK is losing the [chemicals] industry that makes everything [Video] – Sky
Silver and gold continue ‘flabbergasting’ rally – This Is Money
HMRC reports a 65% rise in self-assessment payments via its app – GOV.UK
A weight loss drug habit ‘could affect size of your mortgage’ – Guardian
Some seven million Britons browse Rightmove every week for fun – This Is Money
Global equities are booming – Topdown Charts
Products and services
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Marcus pays 4.55% on its new best buy one-year fixed savings – This Is Money
Which type of mortgage should you choose in 2026? – Which
Get up to £3,000 cashback when you open or switch to an Interactive Investor SIPP. Terms and fees apply, affiliate link – Interactive Investor
Building society launches new 100% mortgage – This Is Money
TSB switch offer: up to £150+£50+£30 – Be Clever With Your Cash
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this affiliate link. Terms apply – Charles Stanley
Why do petrol prices vary so much from one station to the next? – Guardian
Most travel insurance policies don’t cover winter sports – Which
Homes for dog lovers for sale, in pictures – Guardian
Comment and opinion
Trapped in the hell of social comparison – Noahpinion
Killing the goose that lays the golden egg – Behavioural Investment
Why portfolio diversification is about more than just correlations – Morningstar
This is why leasehold reform should be a priority – News on the Block
Cullen Roche discusses Your Perfect Portfolio [Podcast] – Odd Lots
Why are some BTL landlords thriving while others sell up? – Landlord Zone
Gold isn’t special – Humble Dollar
Cheap direct debits for bank switching and rewards – Be Clever With Your Cash
Vanguard talks inertia and behavioural finance [Podcast/transcript] – Morningstar
Tesla is a value stock? The wacky world of factor ETFs [US but relevant] – WSJ
Market expectations mini-special
Expensive is only half the story – Excess Returns
What equity earnings explain and what they don’t [Research] – CFA Institute
A simple metric to predict future stock market returns – Morningstar
When a 40x P/E ratio is a bargain – Flyover Stocks
Naughty corner: Active antics
The reemergence of non-US markets – Enterprising Investor
Consistent fund performance is overrated – Morningstar
Is Japan ‘normal’ again? – The Overshoot
FOMO and the optimal portfolio size – Klement on Investing
Rules matter more than insight – The Financial Pen
Kindle book bargains
How to Own the World by Andrew Craig – £0.99 on Kindle
Zero to One: Notes on Startups by Peter Thiel – £0.99 on Kindle
The Four-hour Work Week by Tim Ferriss – £0.99 on Kindle
How to Break Up With Fast Fashion by Lauren Bravo – £0.99 on Kindle
Environmental factors
Climate stripes updated to show 2025 as third-hottest year ever – BBC
Flying foxes die in their thousands in extreme Australian heatwave – Guardian
This Brighton-based ecologist wants to see 6,000 species in a year – BBC
Solar grazing: a win for sheep farmers or just a PR exercise? – Guardian
Does adding “please” and “thank you” to ChatGPT prompts waste energy? – The Conversation
Robot overlord roundup
Claude Code: move over ChatGPT – The Atlantic [h/t Abnormal Returns]
Apple is partnering with Google to upgrade Siri – Spyglass
No, entry-level jobs aren’t being lost to AI (yet) – Agglomerations
Google removes ‘dangerous and alarming’ AI summaries from search results – Guardian
McKinsey CEO says firm has 60,000 employees, of which 25,000 are AI agents – B.I.
The rise of AI is throttling website traffic – Press Gazette
Not at the dinner table
Statement on the Federal Reserve – Bernanke, Yellen, Geithner, Greenspan, and more
Stewart Lee: Naked imperialistic wars aren’t what they used to be – The Nerve
EU wants ‘Farage clause’ in Brexit reset talks with UK – Guardian
Enforcement regime – Phenomenal World
The world is one bad decision away from a silicon ice age – The Register
Proposed new Ukip logo compared to iron cross used by Nazi regime – Guardian
(Apparently) ending extreme global poverty would cost 0.3% of GDP [Research] – SSRN
Off our beat
Divorce is awesome – Never Enough
Iran’s ultimate banned book – The Dial
What’s behind the phenomenon of ‘gamer brain’? – Guardian
How big tech killed literary culture – UnHerd
The surprisingly long life of the vacuum tube – Construction Physics
Oil: Venezuela’s excrement – Uncharted Territories
The “Are you dead?” app is having a moment in China – BBC
Ten years on, still remembering Alan Rickman – Guardian one, two, and three
And finally…
“A technique that works repeatedly is to wait until the prevailing opinion about a certain industry is that things have gone from bad to worse, and then buy shares in the strongest companies in the group.”
– Peter Lynch, Beating the Street
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- i.e. After backing out what the Bank owns due to quantitative easing.[↩]
The Treasury really does seem to be filled with morons under this Government.
If, as they claimed, the purpose of reducing the Cash ISA allowance is to encourage more people to invest in Stocks and Shares ISAs, how is that going to be achieved by making the latter less attractive (eg by restricting investments) and subject to tax charges? These proposals seem to have been dreamed up by people who have never held a significant sum in a S&S ISA. As the CEO of AJ Bell has said, Reeves ISA meddling is ‘doomed to fail’.
My GIA consists entirely of those top 2 retail gilts.
I’m not sure what I’ll do once the January 2026 one matures, I’ll probably hold a Money Market OEIC for a few months and see where we are in April
T26 and TN28 owner here. The article has made me realise that when T26 matures in two weeks there will be a lot of retail money chasing the next low-coupon gilt.
I’m now contemplating raising some money from elsewhere to reinvest ahead of then. If this was to be in more TN28, though, I’m not sure if any price advantage would be worth the tax on the accrued interest I’d just bought when it pays out a few days later. Basically, I’m thinking out loud – any thoughts out there?
@DavidV. you don’t pay income tax on the accrued interest part of the first coupon payment, it is return of your capital. You can subtract it when calculating income tax due.
Low-coupon-gilt-in-GIA lemming here
I am amazed by the 80% figure. What’s the total value issued?
Is it really worth cashing in a week early to reinvest in (I guess) the 2028 maturity?
@Vanguardfan — I know, right? According to the YieldGimp website the total issue is a smidgeon over £41bn. However the Bank of England owns 48% of that so the free float would be about £21.5bn.
@Baron (4)
Thanks for that. I did actually know that, and adjusted my declared interest accordingly on my first tax return after buying both T26 and TN28. Somehow, though, in the course of my thinking aloud just now I had confused myself on the rules.
Watched that ed Conway video last night. I feel it could of been done better in an article, was a lot of fluff. Basically I took from it our energy costs are the highest in developed world, 4x higher than US. Although we already knew this. It seems to me everything comes down to energy. We are doomed with this net zero nonsense.
@Jim — Yes, it wasn’t the greatest video but it was getting a lot of buzz so I thought I’d include for people to make up their own minds.
As for Net Zero, the only nonsense is that not all countries are taking it so seriously. See the temperature graph in the Environmental Links. I’d agree there is stuff we could do with pricing mechanisms and phasing, perhaps.
@all — This graph showing how younger people got more economically optimistic after Labour was elected while over-50s lag — after a continual slide until 2023 post the EU Referendum result — is pretty revealing:
https://www.bbc.co.uk/news/articles/c150leql9pgo