Freetrade launches Treasury bills offering a 5.2% yield

Freetrade will this week allow its customers access to UK Treasury bills for the first time, giving DIY investors the opportunity to earn over 5 per cent yield to maturity.

Like bonds, Treasury bills are issued by the government to finance its operations, but they have largely been the preserve of wealthy investors with a typical minimum investment of £500,000.

In the past, individual investors have also had to have an account set up directly with a primary participant, usually an investment bank.

Freetrade introduces UK Treasury bills, which are issued and backed by the Government like bonds 

Now, retail investors will be able to buy 28-day Treasury bills in the weekly tender held every Friday by the Debt Management Office on Freetrade’s platform.

They are zero-coupon bonds, meaning they are issued at a discount and redeemed at face value. 

Unlike other bonds which tend to have longer maturity dates, the government will repay the amount invested, plus a fixed return, after 28 days.

Last Friday, the average yield to maturity for Treasury bills was 5.22 per cent. 

But yield to maturity calculates the annualised return you would get on a bond if you held it until its redemption date. It helps investors to compare different bond types and work out which might give you the highest return.

It means that the headline 5.2 per cent figure for Treasury bills is over the year, rather than just 28 days.

For example, investors who put in £1,000 could earn £4.02, meaning a return of £1,004.02 over 28 days. If held for a year, investors could earn £52.20. 

The minimum investment of £50 would earn 20p on top of the £50 invested over 28 days. 

Freetrade will automatically reinvest at maturity but investors can choose to turn the feature off and cash out. Investors can also choose to reinvest a partial amount at any point after purchase.

Founder and CEO Adam Dodds said: ‘I’m excited to announce the launch of this innovative new product for UK retail investors. The UK Treasury bill market is amongst the lowest-risk ways for investors to secure returns that are now finally outstripping the rate of inflation.

‘Until now this market has been shut off for everyday investors. Now we’re opening retail access at a time when it is critical that the Government is able to access deeper and stickier capital pools to support its borrowing and cash needs.’

Freetrade is not charging a custody fee for UK Treasury bills until April 2024.

How do Treasury bills differ from gilts? 

High interest rates on fixed savings accounts have caught many in a tax trap, which means they face paying a huge bill on the interest they make for the first time in years. 

It means gilts have become a popular vehicle for investors to park their cash in to reap the enormous tax benefits.

Investment platforms have reported higher conventional gilt purchases over the past 12 months, with AJ Bell reporting half of the ten most popular investments in September were Government bonds.

Gilts are usually available on the secondary markets, via other investment platforms, but their maturity dates tend to be a lot longer.

UK Treasury bills, which are also issued by the government, have been much harder for retail investors to access and could only be bought directly through the DMO or an investment bank.

> How ‘paying away’ can dodge the savings tax trap on fixed-term bonds 

Treasury bills have tended to be issued by the Government for more day-to-day cash management purposes, reserving big issuances of 30-year bonds or green bonds for when they need to raise a larger amount of capital.

It means that they tend to be for a shorter duration and as explained above they are zero-coupon bonds, meaning they are issued at a discount and redeemed at face value. 

Gilts and Treasury bills are issued at different prices. If the face value of a Treasury bill is £100, an investor buys it at a small discount and after 28 days they are paid back the £100. It means the return is the difference between this discount and what you’re repaid.

Gilts tend to be issued at every face value and will after a certain amount of time pay out a coupon.

Given their shorter duration, prices tend to be less volatile than gilts. The UK government has not once defaulted on Treasury bills since they were first issued in 1877.

Brian Dennehy, managing director of Dennehy Wealth, said: ‘These are gilts by another name, they are just short-dated.

‘We don’t deal in individual gilts, and gilts generally are not well understood by retail investors. Nonetheless, Freetrade have some decent educational material for those keen on investing DIY.

‘It is ironic that this has appeared just as rate cuts appear to be on the horizon, bringing down these yields. But there are probably a few twists and turns yet as we enter a new investment era, with zero rates a distant memory.’ 

James Yardley, senior research analyst at Chelsea Financial Services, added: ‘Anything which gives consumers more choice is a good thing. The only danger is it might encourage over trading if people are moving from stocks to T-Bills regularly. But overall it’s an interesting innovation.’ 

This post first appeared on Dailymail.co.uk