The Treasury has launched a new gilt that is set to pay a rate beating the current best buy savings accounts.
The government bond, launched last week, will pay 5.375 per cent interest until January 2056.
Investors will receive their interest payments as well as the face value of the bond at the end of the period.
The rate offered by the gilt is far ahead of the top savings rates currently offered by banks, with the best non-bonus cash Isa rate from Tembo currently paying 4.80 per cent. CMC Invest offers an Isa with a rate of 5.7 per cent, but this drops to 4.85 per cent after three months.
Dan Coatsworth, investment analyst at AJ Bell said: ‘In the current market, 5.375 per cent equivalent interest could have investors jumping for joy. A bank offering that rate on a cash savings account might have a long line of people queuing up to hand over their money.
‘While that might sound enticing, deciding if the investment is attractive is not as straightforward as you think.’
The Government’s latest gilt issue will pay interest ahead of the current best buy savings deals
Government gilts are essentially IOUs issued by the UK Government on which they will pay a set interest rate over a stated period.
Generally, these bonds are considered low risk investments, with the Government having never yet defaulted on a coupon payment during the term or a gilt repayment at the end.
UK government bonds are becoming increasingly popular investments as retail investors look to make the most of the tax benefits they offer. Interest on gilts is taxed as income, but the bonds are free from capital gains tax.
Coatsworth said: ‘Gilts have also appealed to investors who have used their annual Isa allowance – they’ve been buying gilts with the hope that prices go up and they can make a quick profit. Gilts are advantageous because you don’t pay any tax on capital gains.’
Meanwhile, the shift towards gilts also comes amid concerns that the Government will make changes to the current cash Isa allowance.
What’s the catch?
The 5.375 per cent gilts began trading on Wednesday, meaning that they can no longer be bought from the Debt Management Office at auction. This means that the gilts can only be bought on the secondary market, but this is subject to liquidity, and the price may change.
Gilt yields are subject to market movements, meaning that if the price rises, the yield will fall and if the price falls the yield will rise.
Coatsworth said: ‘If interest rates go up, gilt yields could also move higher. That means future gilt issues could have a more attractive headline yield and investors might sell their existing gilts to buy the newer ones. That process could push down the price of existing gilts.’
He added: ‘Inflation also matters when weighing up gilts. Gilt prices tend to fall when inflation rises by more than expected because investors tend to demand a higher yield to compensate for the erosion of the investment’s value and purchasing power.’
If you sell a gilt when the price has fallen, you will likely make a capital loss
However, if you intend to hold the gilt until it matures that wouldn’t matter, but then it is best to ‘forget’ about it until the time rolls around and redeem it for par value.
The first interest payment on the 5.375 per cent gilt will be made on 31 July this year.
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