RDo you remember last summer when I wondered whether an army of ordinary investors – led by a legion of cash-rich city boys – had gobbled up so many of the low-coupon 2061 Treasury bonds that it distorted the yield curve?
Readers delving into the UK government bond market had their say in the comments. I would say that was the conclusion “Hmm, maybe a little.”
This week the Bank of England published Data shows that at the other end of the spectrum – the ultra-short end, where government bond issues will mature in a year or two – retail investors are definitely leading the way. At least when it comes to the problems with low coupons.
Gold-edged investments
As a reminder, capital gains on government bonds are free of capital gains tax. You only pay tax on the income part of your total return.
If The accumulation As explained to members, this means that holding short-term government bonds with a low coupon can provide a higher after-tax return than cash for investors with a lot of change outside of tax shelters.
A chart from the Bank of England illustrates the difference:
Source: Bank underground
For an investor who has topped up their ISAs (and perhaps maxed out on premium bonds) this tax treatment makes low-coupon short-term bonds much more attractive than cash savings, where just a small tax-free savings allowance protects your interest income from HMRC. Especially with the higher income tax rates.
Unsurprisingly, Bank of England data shows that retail investors (individuals like you and me) own huge amounts of ultra-short, low-coupon government bonds:
Source: Bank underground
About 80% of the free float of those government bonds with a low coupon from 2026 are in the hands of private investors.
Compare that to the medium and long duration of the gilts. Here, retail participation is much lower.
By comparison, the short end of the government bond market is now a common playground for investors.
Millions of people or millions of pounds…
Of course, “common” doesn’t necessarily mean your mom owns a pair.
There could be a relatively small number of wealthy oligarchs whose wealth advisors have put their millions in ultra-short-term government bonds, rather than this being the latest thing for Joe Public.
I first wrote about the tax benefits of low-coupon government bonds in January 2024. I wouldn’t say the response was fanatical.
My fellow blogger’s usually in-depth explanation sparked a bit more interest. But I suspect that after 2022, some readers will just hear the word “bond” and shudder.
If you have a lot of unprotected money that is being taxed, consider this your wake-up call.
Finally, the Bank’s holdings data sheds more light on Treasury 2061, showing that retail investor involvement here is actually very small.
That doesn’t mean the special attractions of the Ministry of Finance 2061 do not distort the yield curve. But it does suggest that it is institutions (hedge funds and the like) that are driving this train.
Have a nice weekend!
From Monevator
Asset Allocation Quilt: Winners and Losers of the Last Ten Years – Monevator
Childcare Financing: How to Navigate a Complex System – Monevator
From the Archiver: Ten Ways to Be a Terrible Investor – Monevator
News
Returns on uninvested cash in shares ISAs can be charged 22% – This is money
The British economy grew by 0.3% in November, exceeding expectations BBC
It’s a buyer’s market as the number of homes for sale reaches an eight-year high This is money
Scotland is introducing a country house tax on £1m homes An eye for the real estate sector
Britain loses the [chemicals] industry that makes everything [Video] – Air
Silver and Gold Continue ‘Baffling’ Rally – This is money
HMRC reports a 65% increase in self-assessment payments through its app – GOV.UK
A diet addiction ‘can affect the size of your mortgage’ – Guardian
Around seven million Brits surf Rightmove for fun every week – This is money
Global equities flourish – Top-down charts
Products and services
Disclosure: Links to platforms may be affiliate links, from which we may earn a commission. This article is not personal financial advice. When you invest, your capital is at risk and you may get back less than you invested. Other fees may apply for commission-free brokers. See conditions and costs. Past performance is no guarantee of future results.
Marcus pays 4.55% on his new one-year best buy fixed savings – This is money
Which mortgage type should you choose in 2026? – Which one
Get up to £3,000 cashback when you open or switch 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 smart with your money
Get up to £1,500 cashback when you transfer your money and/or investments to Charles Stanley Direct via this affiliate link. Terms and conditions apply – Charles Stanley
Why do gasoline prices vary so much from station to station? – Guardian
Most travel insurance policies do not cover winter sports – Which one
Houses for dog lovers for sale, in photos – Guardian
Commentary and opinion
Trapped in the Hell of Social Comparison – Noahpinion
Killing the goose that lays the golden egg – Behavioral investment
Why portfolio diversification is about more than just correlations – Morning star
This is why leasehold reform must be a priority – News from the Block
Cullen Roche discusses Your perfect wallet [Podcast] – Odd amount
Why do some BTL landlords thrive while others sell? – Landlord zone
Gold is not special – Modest dollars
Cheap direct debits for bank switching and rewards – Be smart with your money
Vanguard talks about inertia and behavioral finance [Podcast/transcript] – Morning star
Tesla is a value stock? The crazy world of factor ETFs [US but relevant] – WJ
Mini-special on market expectations
Duration is only half the story – Excess returns
What explains stock gains and what doesn’t [Research] – CFA Institute
A simple measure to predict future stock market returns – Morning star
When a 40x price/earnings ratio is a bargain – Viaduct shares
Naughty angle: active antics
The re-emergence of non-US markets – Enterprising investor
Consistent fund performance is overrated – Morning star
Is Japan ‘normal’ again? – The excess
FOMO and the optimal portfolio size – Klement about investing
Rules are more important 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 away from fast fashion by Lauren Bravo – £0.99 on Kindle
Environmental factors
Climate bars updated to show 2025 as third warmest year on record BBC
Flying foxes die by the thousands during extreme heatwave in Australia Guardian
This Brighton ecologist wants to see 6,000 species in a year – BBC
Solar meadow: a victory for sheep farmers or just a PR exercise? – Guardian
Adds “Please” And “Thank you” to ChatGPT asks for energy waste? – The conversation
Robotoverlord collection
Claude Code: go over ChatGPT – The Atlantic Ocean [h/t Abnormal Returns]
Apple partners with Google to upgrade Siri Viewer
No, entry-level jobs will not (yet) be lost to AI – Agglomerations
Google removes ‘dangerous and alarming’ AI summaries from search results Guardian
McKinsey CEO says the company has 60,000 employees, of which 25,000 are AI agents – BI
The rise of AI limits website traffic – Press Gazette
Not at the dining table
Statement on the Federal Reserve – Bernanke, Yellen, Geithner, Greenspan and more
Stewart Lee: Naked Imperialist 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 registry
Proposed new UKIP logo compared to Iron Cross used by Nazi regime – Guardian
(Apparently) ending extreme poverty in the world would cost 0.3% of GDP [Research] – SSRN
Out of our league
Divorce is great – Never enough
Iran’s Ultimate Banned Book – The dial
What’s behind the ‘gamer brain’ phenomenon? – Guardian
How Big Tech Killed Literary Culture – Dismay
The surprisingly long lifespan of the vacuum tube – Building physics
Oil: Venezuela’s feces – Unknown areas
The “Are you dead?” app is having a moment in China – BBC
Ten years later I still remember Alan Rickman – Guardian An, twoAnd three
And finally…
“A technique that works time and time again is to wait until the prevailing opinion about a particular sector 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
Do you like these links? Subscribe to receive them every Saturday. Please note: this article contains affiliate links, such as from Amazon and Interactive Investor.
#Weekend #lecture #Gaga #gilts #Monevator