15 February 2011
• Statistics suggest that UK private investors have cut their holdings
• Suspicion that QE is “chicanery”
Our research has shown that the value of UK private investors’ holdings of gilts in their ISAs has fallen by 21% to £931 million in the last year from £1.1 billion (from 31 March 2009 to 5 April 2010).
With the price of gilts having remained largely unchanged over that period, the fall in gilt holdings suggest UK private investors might be shunning UK Government debt.
Comments Mike Smith, senior financial planning consultant at UHY Financial Planning, based in our Manchester office: “In the immediate aftermath of the financial crisis, private investors made a dive for safety and bought gilts. But since then, Quantitative Easing and the row over the budget deficit have made the prospects for gilts one of the most hotly debated investment topics.”
Quantitative Easing is the Bank of England’s £200 billion programme of buying UK Gilts and corporate bonds in an effort to keep the cost of borrowing low. Quantitative Easing lowers interest rates by pushing down bond yields, which interest rates are linked to. Bond yields reflect the relationship between the market price of a bond and the regular payments made to bond holders, and yields fall when the price of a bond rises.
Says Mike: “Despite assurances from the Bank of England a lot of investors feel that Quantitative Easing has kept the price of gilts artificially high and some commentators have even claimed that the Bank of England is trying a bit of financial alchemy.”
“Add to that a runaway deficit that is only now being reined in and it is hardly surprising that the private investor love affair with gilts has gone off the boil.”
“It is too early to say whether the coalition Government’s more bond market friendly policies will convince private investors to start buying back into Gilts through their ISAs.”
In the 2007/2008 tax year, the total value of private investors’ holdings in gilts through ISAs was £526 million, rising to over £1.1 billion the following year.
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