AJ Bell customers snap up bonds amid rising yields

Rising bond yields have caught the attention of AJ Bell DIY investors in the past month, who have increased their holdings in bond products both in terms of net buys and net flows in comparison to the past year.

The buying flurry comes on the back of government bonds making their way into the headlines both in the US and the UK. Last week, 10-year gilts reached their highest yield in 18 years, since the Great Financial Crisis. US treasuries have also been on the move as new Federal Reserve chair Kevin Warsh indicated a commitment to the 2% inflation target at the Jackson Hole Symposium, prompting analysts to increase the likelihood of an interest rate hike at its next meeting on 16 September.

Could rising yields be a positive?

While rising bond yields may sound like a positive thing, bond yields and prices have an inverse relationship so when bonds are being sold, yields will go up. Higher yields can be a result of increased inflationary pressures and elevated government debt levels. Both of these factors are certainly at play right now.

A prolonged US-Iran conflict has caused energy price increases that have fed into higher inflation. And since 2020, the UK has had a debt to GDP ratio above 90%. At the end of August, the OBR announced its spending estimates for the first fourth months of the 2026-27 tax year were above its forecasted levels.

Bond yields also have an interesting relationship with stocks. The returns from stocks, which are higher up the risk spectrum than bonds, can look less attractive when the latter are offering more generous yields. Inversely, high levels of success in the stock market can also make investors less attracted to bonds, where the returns can look meagre in comparison to the stock market’s performance. This has certainly been the case in the past five years, as the MSCI World has averaged a 12% total return. Because companies and governments still often need to take on debt, they will be forced into offering it with a more attractive coupon to persuade buyers who feel they could get strong returns elsewhere.

• Read: Bond yields are rising again: here's why investors should care

What investors are buying

Many of the top bond products being purchased by investors are gilts with low coupons, for example under 0.5%, or UK treasury bills. Low-coupon gilts are particularly appealing products to investors who are looking for a tax break on their investments, as only the coupon on a gilt faces income tax. Any increase in value before redemption or on an earlier sale is generally exempt from capital gains tax. So, if these products can be purchased when prices are low, there’s more room to grow when it comes to capital gains. That growth will be tax-free, meaning investors keep all of the return on sale or redemption.

For example, the top bond product being purchased by AJ Bell DIY investors, the HM Treasury Gilt 0.125% (31/01/28) has a coupon of 0.125% but a yield to maturity of 4.16% at time of writing. Most of the return for an investor buying now would be classed as gains and therefore be tax free. 

However, there is different tax treatment for UK treasury bills. The returns you make on these products are treated and taxed as income. As UK treasury bills are issued with maturities of less than 12 months, they cannot generally be sold on a secondary market in the meantime. If there are any available, they will be found on AJ Bell’s New issues page. Both gilts and treasury bills can be held in a Stocks and shares ISA to shelter any returns from income tax.

Enjoying a payday from a gilt will mean either waiting until its maturity, when the government would pay back its value of £100, or selling it on to another investor before then. Those who hope to sell on the bonds instead of waiting to maturity will have to hope that bond yields calm, causing a price increase where they can sell for a profit.

The two investment trusts listed as popular product choices, Invesco Bond Income Plus and CQS New City High Yield, both hold mostly corporate bonds. Both pay hefty dividends which aid in their popularity, with CQS at 8.93% and Invesco Bond Income Plus at 7.14%.

Does the popularity of bond investments reflect a flight to safety?

Some of the movement into bonds will reflect greater nervousness towards equity markets, and higher bond yields exacerbate this effect. When government bond yields rise, corporate bond yields are likely to rise as well to stay attractive relative to their risk level.

For corporations, this ultimately means a higher cost for their spending in the long term which can have a negative impact on balance sheets, and further, a negative impact on the share price if investors become more wary about the balance sheet.

Many of the market’s major tech companies have piled up debt in an effort to build out their AI capabilities quickly, but the payoff for their investment could be far down the road. Some investors worry that if the market loses patience, or if the company’s bets don’t pay off, markets could face a strong downturn. Tech giants Alphabet, Amazon, Oracle, Meta and Microsoft together issued about $121bn in debt through bonds in 2025. Estimates of the companies’ off-balance sheet commitments range into the trillions.

Despite this, many of these companies still have extremely high credit ratings. Alphabet has most recently been assigned AA+ by S&P Global, and Amazon, AA. Of course, ratings are no guarantee. For some investors, this market story is making bonds look appealing for their stability, not just the yield offering.