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Bonds to be sold to savers amid fears of lack of demand for British debt

Bank of England
Bank of England

Ordinary savers will be able to buy Government bonds directly from the Treasury in a move that will put individual investors on a par with big City institutions for the first time.

The Debt Management Office (DMO) will allow retail investors to take part in auctions of gilts, as UK government bonds are known, rather than having to wait to buy the debt from institutions on the secondary market.

It offers an alternative to National Savings and Investment (NS&I), the usual vehicle the Government uses to borrow money from the public.

The first gilt that ordinary people will be able to buy in this manner is a 4pc bond maturing in 2031, which the DMO will issue on February 29. The DMO aims to raise £4bn for the Exchequer with the bond.

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The change comes at a time when the Government is issuing record amounts of gilts, partly because it is borrowing heavily and partly because a large amount of debt issued in previous years is maturing and needs to be refinanced.

There are fears the Government could struggle to find buyers for all of its debt. The Bank of England is selling down its portfolio of bonds bought under the quantitative easing programme at the same time as the DMO is charged with selling record quantities of gilts, potentially flooding the market.

Concerns over demand for long-term gilts have also been stoked by the fact that final salary pension funds, which had previously been reliable investors in the market, are increasingly selling off bonds to pay out pensions.

Without reliable buyers, the Government may have to offer higher interest rates to tempt foreign investors to buy British debt.

Allowing individual savers into the auctions raises the possibility they will be able to benefit from a slightly lower price, resulting in slightly higher returns than those typically available when buying gilts from brokers.

Savers can use accounts at Hargreaves Lansdown and Interactive Investor to place orders for gilts directly from the Government.

More than 25,000 investors already hold gilts bought through the secondary market with Hargreaves, indicating a degree of demand from savers.

Tim Jacobs, head of primary markets at Hargreaves Lansdown, said the new setup “is a ‘first’ for retail investors and gives them fair access to gilts in the primary market under favourable terms”.

He said: “Muted equity markets and higher interest rates have led to a significant rise in client demand for fixed interest products.

“The conventional auction process for gilts is designed for institutions and may not be suitable for some retail investors. However, the new process invites retail investors to participate with favourable terms.”

A DMO spokesman said: “We welcome this collaborative, market-led initiative. 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 forming part of the current auction programme, in addition to the variety of routes already available in the secondary market.”