In the year following the UK government’s well-known “mini-budget,” the demand for direct fixed-income securities has reached new heights in 2023, at least for now. This information comes from data provided by interactive investor, which is the UK’s second-largest investment platform for individual investors who manage their investments. The data focuses on customer transactions.
After a significant market downturn a year ago, yields, which were already inching up due to rising interest rates, were pushed even higher, making the fixed-income asset class more appealing to many investors. However, it’s important to note that this increased interest primarily pertains to the entry point, as falling bond prices have demonstrated that no investment is entirely risk-free.
Between September and December 2022, customer purchases of direct fixed income and corporate bonds combined on interactive investor increased by a remarkable 779% compared to the previous year. It’s worth mentioning that this surge started from a relatively low base.
Over the past 12 months since the mini-budget, this trend has continued, with purchases of fixed-income and corporate bonds rising by 678% compared to the previous year, once again, from a low starting point. When examining the month-to-month data, there have been even more significant spikes this year as interest rates continued to rise.
In July 2023, interactive investor recorded its highest number of fixed-income and corporate bond trades combined on record, with trades up a staggering 2,730% year-on-year. This occurred in the same month when the expectation of “higher for longer” interest rates caused global bond yields to soar. Additionally, August 2023 saw the second-highest spike on record, with corporate bond and fixed-income trades increasing by 1,253%.
To assist investors in navigating the often complex fixed-income market, interactive investor increased its editorial content on bonds in the spring and summer of 2022. This decision was made on the premise that bond markets, which are sensitive to high inflation and interest rate hikes, had experienced declines in value, resulting in higher yields and making the asset class more attractive. The aim was to provide relevant, engaging, and responsible content to help customers make informed decisions.
While interactive investor has always covered the bond market, they recognized that in a rising interest rate environment, there might be a greater interest among private investors in bonds.
Sam Benstead, Bonds Specialist at interactive investor, explained, “Investing in fixed-income securities directly requires thorough research, but the upside is that you can benefit from yields that can outperform cash savings accounts and money market funds. You also have the flexibility to hold them in tax-friendly ISAs or SIPPs. While the end of UK interest rate hikes may be in sight, private investors are currently taking advantage of attractive bond yields and locking in income, assuming they intend to hold the bonds until maturity.”
Many investors may prefer to access fixed income through professionally managed bond funds. While the yields may not be as enticing initially because fund managers likely purchased bonds at lower yields for a fixed term, this approach helps spread risk and provides peace of mind with professional management, regardless of the market conditions.
For now, a growing number of self-directed private investors are turning to direct bonds, particularly favoring gilts with short maturities and low coupons. This strategy allows investors to derive most of their returns from capital appreciation upon maturity, which is tax-efficient because gilts are exempt from capital gains tax. Interactive investor offers access to the entire market of gilts available to retail investors, with the option to honor online rates for phone deals. There is no specific minimum investment amount, as different bonds have different nominal sizes, but it’s not uncommon to see trades as low as £25.