Would you buy Ultra Low Coupon Gilts?

Dear advisers

Investment consultancy Elston has published a white paper calling on platforms to offer access to near-term low-coupon direct gilts to enable more advisers to use them as an alternative to cash deposits.

It has calculated the move could bring down UK govt debt while raising the returns investors can expect.

It has come up with a 3-step plan (their words):

1.      Shorten it: Shortening the maturity profile of the UK’s overall stock of government debt would help reduce the long-term overall cost of servicing that debt.

2.      Shrink it: By issuing shorter-dated debt to buy back below-par longer-dated debt, the overall nominal value of debt outstanding reduces, lowering the debt/GDP ratio

3.      Sharpen it: By issuing shorter-dated (<5 year) debt as Ultra Low Coupon Gilts, it sharpens up the yield received by investors owing to the CGT exemption for direct gilts relative to cash deposits.  This makes it extremely attractive for higher and additional rate taxpayers to to buy gilts (lend to the Government).

They've also made some technical recommendations for platforms and the DMO. 

These include:

1.      Issue near-term (<5 year) Ultra Low Coupon Gilts to maximise tax efficiency and attract retail investors, building on the success of recent tenders.

2.      Close the gaps in the maturity ladder and align maturity dates: Over the next six years to 2030, six tax payment deadlines have gilts with aligning maturities gilts, six do not.  Also aligning maturity dates for these retail-friendly near-term Gilts to 24th, not 31st of January and July, creates sufficient time for principal payments to clear to retail platforms and from there to client’s bank accounts for onward payment to HMRC. This represents an operational improvement from UK advisers’ perspective.

3.      Providers should help broaden access: only two of 19 investment platforms used by financial advisers provide access to Direct Gilts.  A concerted effort by the other platforms to improve access to Direct Gilts could open the door to the £1 trillion UK advisory platform market.  For DIY investors, clearer labelling, signposted data presentation and enabling comparisons could help guide and inform investors.

But what do you think? Would you be interested in this offering? What are the risks and pitfalls in Elston's propsals?

It's for FT Adviser.

Thank you!

Carmen

carmen.reichman@ft.com