The Week That Was: investors snap up fixed income securities

Move follows the mini-budget-fuelled market sell-off as yields rose.

• ii saw a 400% year on year increase in September 2022 in direct fixed income securities trades* 

Following the UK government’s mini-budget on 23 September, interactive investor, the UK’s second-largest private investor platform, saw a significant uptick in retail investors buying direct fixed income securities last week. This was presumably to take advantage of higher yields following the sharp market-sell off, with last Wednesday being particularly active.

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The platform, which increased its editorial output for customers on bonds earlier this year to help investors navigate the fixed income market, saw a 400% increase in September 2022 in direct fixed income securities trades (by number) compared to September 2021. Index linkers also became more popular.

Lee Wild, Head of Equity Strategy, interactive investor, says: “Launching our bond project in July, our rationale was simple: bond markets, sensitive to high inflation and interest rate hikes, had fallen in value and yields had risen, making the asset class more attractive. We wanted to ensure there is relevant, engaging, and responsible content to guide investors through the often-complicated world of fixed income. We have always covered the bond market, but recognised that we are in a rising interest rate environment where there may well be an increase in private investor interest in bonds. And the last week or so, in particular, is a case in point.”

For context – direct bonds typically account for less than 1% of customer portfolios on ii. 

Although not the most traded on the platform, the increased activity last week is noteworthy.

The active retail market for gilts amid rising yields

Sam Benstead, Collectives Editor, interactive investor, explains: "There is an active retail market for gilts, with issues priced at £100, allowing regular investors to own government debt. Buying index-linked and regular gilts directly allows investors to lock in returns that can beat cash savings accounts and money market funds, and all within tax-friendly ISA and SIPP accounts. 

“Investors need to do their homework, and we’ve seen many investors erring towards bonds set to mature soon, with the five most popular gilts this week maturing before summer 2025.”

Accessing fixed income directly versus via a fund

Benstead continues: “Buying bonds directly, rather than via a bond fund, means investors get the full benefit of rising yields. In contrast, buying bond funds means investors get a slice of a basket of bonds that were highly likely to be bought at lower yields by a fund manager. While a more diversified approach to bond investing, and the fund manager will now be adding higher yielding bonds to a portfolio, a fund’s ‘distribution’ yield will lag the yield available on similar direct bonds. Therefore, buying bonds directly can be a more effective way for sophisticated investors to profit from the spike in yields.

“Investing directly in fixed income securities won’t be for everyone – it requires a lot of knowledge and research. For investors looking for a diverse portfolio of bonds, money market funds can be a better option, even if the income will be lower.” 

Breaking down the bonds investors have been buying

Benstead adds: “The most popular bond among ii investors last week has been TR25. Due to mature in March 2025, it trades just close to par, at £102. This means its 5% coupon rate, set when the bond was issued in 2004, is available to investors today. Another popular bond over the same time frame was T23. Issued in 2013, it matures in September 2023 and pays a 2.25% coupon.”