Hargreaves Lansdown and Interactive Investor two of Britain’s largest stockbrokers, and direct-to-consumer investing platforms, are opening up the UK Gilt-edged or government bond market to retail traders and savers. HL & II are partnering with one of the UK’s largest domestic market makers, Winterflood Securities, to offer retail traders and investors access to DMO auctions for the first time.
What is the DMO and what does it do?
The DMO, or Debt Management Office, is the part of HM Treasury that looks after debt and cash management on behalf of the Government.
Part of that remit is the issuance and auction of UK government bonds or Gilt-edged securities, otherwise known as Gilts.
- Related guide: How to buy Gilts
What are Gilts?
Gilts are effectively government-backed IOUs.
Via Gilt issuance the UK government borrows money from the financial markets, paying an annual rate of interest for the duration of the loan.
Repaying the principal, to the lenders, on the maturity of that loan.
New issues of Gilts are bought to market by the DMO under an auction system, in which investors bid for the bonds at a particular yield or interest rate.
The pricing of those bids will depend on a variety of factors including:
- Underlying interest rates and swap market spreads
- The supply and demand of Gilts, both those in issue and those in the pipeline
- Sentiment among investors in the fixed-income markets
Can private investors buy and hold Gilts?
Yes, retail investors can invest in and hold Gilt-edged securities, however, until now they have had to invest in them in the secondary markets through their broker, rather than at issue.
Gilts issued through the auction process can often come at a small discount to comparable existing issues in the secondary market.
A benefit that until now has been exclusive to banks, brokers and their institutional clients.
The new initiative comes at a time when government bond issuance is on the up and brings the country into line with peers in Europe and North America.
- Related guide: Are UK Government Bonds (Gilts) A Good Investment?
So how will the process work?
Hargreaves Lansdown and Interactive Investors are now accepting orders from clients for the forthcoming issue of Treasury 4.0% bonds due in 2031.
Retail investors in the issue will be given the average price for the auction, which is for £4.0 billion worth of the bond.
And crucially they will not pay any commission or dealing fees on their order, unlike trading Gilts in the secondary market.
Retail investors will only be able to participate in auctions for new issues and not so-called Taps, which are additional issues of bonds already in the market, however, that may change in future.
Gilts can be held tax-free within both ISAs and SIPPs, something that’s likely to appeal to long-term retail investors and savers.
Tim Jacobs, head of primary markets at Hargreaves Lansdown said:
“We think there will be significant demand (and) It’s another example of retail investors being taken seriously- they are finally getting a seat at the table.”
Whilst Sir Robert Stheeman, the CEO of the UK DMO said:
“We value the importance of having as diverse an investor base as possible and this initiative will provide retail investors with an additional opportunity to access gilts.”
With over 35 years of finance experience, Darren is a highly respected and knowledgeable industry expert. With an extensive career covering trading, sales, analytics and research, he has a vast knowledge covering every aspect of the financial markets.
During his career, Darren has acted for and advised major hedge funds and investment banks such as GLG, Thames River, Ruby Capital and CQS, Dresdner Kleinwort and HSBC.
In addition to the financial analysis and commentary he provides as an editor at GoodMoneyGuide.com, his work has been featured in publications including Fool.co.uk.
As well as extensive experience of writing financial commentary, he previously worked as a Market Research & Client Relationships Manager at Admiral Markets UK Ltd, before providing expert insights as a market analyst at Pepperstone.
Darren is an expert in areas like currency, CFDs, equities and derivatives and has authored over 260 guides on GoodMoneyGuide.com.
He has an aptitude for explaining trading concepts in a way that newcomers can understand, such as this guide to day trading Forex at Pepperstone.com
Darren has done interviews and analysis for companies like Queso, including an interview on technical trading levels.
A well known authority in the industry, he has provided interviews on Bloomberg (UK), CNBC (UK) Reuters (UK), Tiptv (UK), BNN (Canada) and Asharq Bloomberg Arabia.
