Hargreaves Lansdown and Interactive Investors open up UK Gilt auctions to retail investors

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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.

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.

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.”

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