Who is buying UK Gilts?

The Bank of England’s Bankstats report revealed a significant uptick in foreign investment in UK government bonds, known as Gilts. In December alone, overseas investors added £27.9 billion to their Gilt holdings, marking a substantial increase from the £12.5 billion monthly average recorded between September and November.

This surge pushed the twelve-month moving average for non-resident Gilt purchases close to the historical peak observed in 2021.

The fourth quarter of 2024 stood out as the period with the highest quarterly rise in foreign Gilt holdings since the year 2000, surpassing the previous record of £47.7 billion set in the fourth quarter of 2020. Throughout 2024, foreign investors were the leading buyers of Gilts, acquiring a total of £102.3 billion.

The Bank of America suggests that the strong foreign demand for Gilts may continue into January. The elimination of political uncertainty following elections in July and the appeal of UK yields after the December sell-off likely contributed to the increased interest in Gilts during the last quarter of 2024.

Despite high non-UK SSA issuance in January, which might suggest a lower demand for Gilts from certain investors, attractive yield levels and potential rebalancing needs due to the weakness of the trade-weighted British pound could maintain or even boost foreign demand.

However, the report also highlighted concerning trends among domestic non-bank investors. In December, these investors reduced their Gilt holdings by £18.4 billion, a stark reversal from the £6.1 billion in purchases in October. Throughout 2024, domestic non-banks were the second-largest group of Gilt buyers, with acquisitions totaling £76.9 billion.

The Bank of America analysts believe that previous strong purchasing figures may have been inflated by the repatriation of pension fund Gilt holdings and a shift from swap-based to Gilt-based hedging strategies.

In contrast to non-bank domestic investors, UK banks increased their Gilt holdings by £6.4 billion in December, contributing to a total increase of £49.6 billion for the year 2024. This is a significant rise from the £33.2 billion recorded in 2023.

The buying patterns of both domestic banks and overseas investors tend to be concentrated on the shorter end of the Gilt curve. The December Gilt buying data aligns with feedback provided to the Debt Management Office (DMO) last week, which pointed to weakening demand for long-end Gilts and support for a potential reduction in the duration of Gilt supply.

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