This note is my own reference for a very specific (but common) question:

“I want dry powder in GBP for ~6 months. I don’t want equity drawdowns, but I also don’t want to earn literally nothing. What actually counts as ‘cash-like’ in the UK?”

The trap is that many things look cash-like (they’re ‘bonds’, they ‘yield’, they’re ‘government’), but behave very differently once you zoom in on what risk you’re actually taking.

This post writes down:

  1. What “cash equivalents” really are (and what they aren’t).
  2. NS&I-style cash equivalents: what’s special about them.
  3. What “money market” means in practice.
  4. What SONIA is, and what SONIA-style funds are trying to give you.
  5. UK gilts vs UK Treasury bills vs “GBP bonds”.
  6. Practical examples you can reuse later.

1. Start with the job: what does “cash-like” need to do?

For a 6-month parking problem, your capital has three jobs:

  1. Hold nominal value (no multi-percent drawdowns).
  2. Stay liquid (you can redeploy when you want).
  3. Earn something sensible (but without secretly becoming a macro trade).

If you only remember one sentence:

For short horizons, optimise for low duration and low credit sensitivity, not for “headline yield”.

2. NS&I-type cash equivalents

NS&I is not “just another bank”. It’s the UK government’s savings bank, and its defining feature is:

HM Treasury guarantees 100% of everything you invest in NS&I (not a capped FSCS limit). (NS&I)

That makes NS&I products behave like “sovereign-backed savings wrappers”.

2.1 Premium Bonds (NS&I)

Premium Bonds are the weird one:

  • They don’t pay interest.
  • Instead, you’re entered into a monthly prize draw funded by a published “prize fund rate”. (NS&I)

So they are cash-like in principal stability, but return is lottery-distributed, not “yield”.

Use case: You care about safety + optional upside + tax-free prizes, and you’re fine with variability.

Non-obvious downside: If you need predictable income (or predictable total return), Premium Bonds are the opposite of that.

2.2 NS&I savings accounts / bonds (Direct Saver, Direct ISA, Guaranteed Growth/Income etc.)

NS&I also offers conventional savings products with stated rates, and publishes the current rates on its site. (NS&I) And NS&I explicitly markets its products as fully secure because of HM Treasury backing. (NS&I)

Use case: You want simplicity, safety, and you don’t need the intraday tradability of an ETF.

3. What “money market” actually means

“Money market” is not “the stock market”.

It’s the market for short-term borrowing and lending (think: overnight to a few months), using instruments like:

  • bank deposits
  • certificates of deposit (CDs)
  • commercial paper (CP)
  • repurchase agreements (repo)
  • Treasury bills (government short-term paper)

A money market fund (MMF) is an open-ended fund designed for liquidity management, investing in short-term, high-quality instruments. The FCA describes MMFs as a cash-management product and discusses their role and vulnerabilities during stress (the “dash for cash”). (FCA)

Important: “money market” aims to be cash-like, but it is still an investment fund, not an insured bank deposit.

4. SONIA: the reference rate behind “SONIA-style funds”

SONIA = Sterling Overnight Index Average.

The Bank of England defines SONIA as an interest rate benchmark based on actual overnight transactions, reflecting the average rate banks pay to borrow sterling overnight. (Bank of England)

And the BoE is explicit about methodology:

  • It’s measured as a trimmed mean of eligible transactions each London business day. (Bank of England)

4.1 What is a SONIA-style fund?

A SONIA-style fund (or ETF) is usually trying to deliver:

“Something close to the overnight cash rate in GBP, inside a brokerage account.”

Mechanically, it can do that in different ways:

  • Physical-ish approach: hold short instruments / repo and earn near overnight rates.
  • Synthetic / swap approach: use derivatives to exchange returns for SONIA-like returns.

Both can be “cash-like”, but the risks differ:

  • Fund structure risk: it’s a fund; it can trade at small premiums/discounts intraday.
  • Counterparty / collateral mechanics: more relevant for swap-based products.
  • Operational + platform details: distributions, dealing cut-offs, and how quickly you can exit.

5. UK gilts vs UK Treasury bills vs “GBP bonds”

This is where people get misled by language.

5.1 UK Treasury bills (T-bills)

From the UK Debt Management Office:

  • UK Treasury bills are sterling-denominated unconditional obligations of the UK Government.
  • They are zero-coupon securities.
  • Maturities range up to 364 days (with common tenors around 1, 3, 6 months). (DMO)

A T-bill is basically: “lend to the UK government for a few months; get repaid at maturity”.

Why it’s cash-like: extremely short maturity -> very low sensitivity to yield moves.

5.2 Gilts

A gilt is a UK Government liability denominated in sterling, issued by HM Treasury and listed on the London Stock Exchange. (DMO)

Gilts can be short, medium, or long maturity.

Key point: Gilts are government-backed, but long gilts are not cash-like. They carry duration (interest-rate sensitivity).

5.3 “GBP bonds”

“GBP bond” usually just means:

“A bond denominated in pounds.”

That tells you currency, not safety.

A GBP bond could be issued by:

  • a bank
  • a utility
  • a property company
  • a foreign government issuing in GBP
  • etc.

So GBP bonds introduce credit spread risk (the market reprices the issuer’s risk premium).

This is why two instruments can both be “GBP bonds” yet behave completely differently in stress.

6. The two risks that matter for short-term parking

6.1 Duration (rate sensitivity)

Duration is what turns “yields moved” into “your price moved”.

The basic approximation:

\[\frac{\Delta P}{P} \approx -D_{\text{mod}} \cdot \Delta y\]
  • If duration is 0.25, a 1% move in yields is about 0.25% price move.
  • If duration is 8, that same 1% move is about 8%.

For a 6-month parking job, you want your portfolio to behave like the first line, not the second.

6.2 Credit spread sensitivity (credit repricing)

A credit bond’s yield is roughly:

Yield = government yield + credit spread

If the market gets nervous, spreads widen, and credit bond prices fall.

Even in “ultrashort credit” funds, this effect is small-but-real and it tends to show up exactly when you least want surprises.

7. Practical examples

Example A: “I want boring dry powder for ~6 months”

The clean mental bucket is:

  • Cash / NS&I
  • T-bills
  • Money market / SONIA-like funds

These are all variations of “I’m staying at the front end”.

Example B: “This ‘gilt ETF’ yields 4-5% - why not park money there?”

Because “yield” is not the point. The point is:

  • how much price volatility you are accepting over your horizon

Longer-dated gilt funds can easily swing several percent over months. That may be totally fine as a deliberate macro position, but it’s a bad fit for “dry powder”.

Example C: “What about corporate GBP bond funds?”

Now you’re doing “cash-plus”:

  • slightly higher yield
  • but now you’ve introduced spread risk and sometimes liquidity effects

That’s a valid choice if you intend it, but it is not the same tool as cash/T-bills/MMFs.

8. A simple decision checklist

When you look at any “cash-like” idea, ask:

  1. What is the issuer risk? (UK government vs bank vs corporate)
  2. What is the maturity/duration? (days/months vs years)
  3. Is the return lottery-like or rate-like? (Premium Bonds vs SONIA/T-bill yield)
  4. Is it a deposit or a fund? (guarantee/insurance vs NAV mechanics)
  5. Can I exit cleanly on the day I need it? (liquidity and platform frictions)

Closing note

If your goal is 6-month optionality, the “correct” answer is often boring. That’s not a flaw - it’s the point. Your dry powder is there to let you act when opportunities show up, not to sneak in an unpriced macro bet while you wait.

Appendix B: Brokerage-based cash management (SONIA-style funds, money-market ETFs, and “just leave it as cash”)

This is the version of “cash management” that lives inside a brokerage account (Trading 212, IBKR, etc.), where the goal is:

  • keep money liquid
  • keep volatility near zero
  • earn something close to the policy/overnight rate
  • be able to deploy immediately when you see an opportunity

0) The first fork: do you want a deposit return or a market return?

Inside a broker, you typically have three “cash-like” choices:

  1. Broker cash interest (if your broker pays it)
  2. Overnight-rate ETFs (SONIA-style)
  3. Short-dated government paper (T-bills) or money-market funds (availability depends on platform)

They sound similar. They aren’t.

1) Broker cash interest (the “I refuse to overcomplicate this” option)

Trading 212, for example, pays interest on uninvested cash (rate varies by currency and time; and you can usually toggle it). (Trading 212)

Why this is attractive

  • No ETF spread, no premium/discount games
  • No need to think about swap structures, distribution dates, fund docs
  • You can deploy instantly because the money is already “cash”

What to check (non-negotiable)

  • What is the current GBP rate the broker pays? (It changes) (Trading 212)
  • Are there any eligibility or limits?
  • Is interest paid daily / monthly, and does it require you to opt-in?

A simple mental calculation (so you don’t fool yourself)

If GBP cash interest is 3.8%, then over 6 months (roughly half a year):

  • GBP 100,000 x 0.038 x 0.5 = ~GBP 1,900 gross

That’s the benchmark. Any ETF you buy should beat that only if it’s taking risks you’re happy with, or it tracks a higher reference rate after fees.

2) SONIA-style ETFs (the “cash rate in an ETF wrapper” option)

SONIA is the Bank of England’s sterling overnight benchmark rate. (Xtrackers ETFs) A SONIA-style ETF is trying to give you something like:

“overnight sterling return, compounded, with very low volatility”

Example: XSTR (Xtrackers II GBP Overnight Rate Swap, Dist)

This ETF is explicitly built around a SONIA-based index (Solactive SONIA Daily Total Return). (Xtrackers ETFs) Key characteristics you can verify quickly:

What “swap replication” actually means (in one paragraph)

Instead of holding a pile of bills and deposits, the fund can use a derivative contract to swap some collateral return into the index return it wants (SONIA-like). That introduces:

  • counterparty structure (mitigated by UCITS collateral rules, but still conceptually different from a deposit)
  • a reliance on fund mechanics (NAV, spreads, dealing)

In practice, for a retail investor using it as dry powder, what you feel is:

  • it behaves “boringly” most days
  • you still use limit orders
  • and you accept that it’s a fund, not a bank balance

Why a SONIA ETF can be better than broker cash interest

  • It often tracks the “cash rate” more directly (net of fees), rather than whatever your broker chooses to pay.
  • You can hold it in the same place as the rest of your portfolio and deploy when needed.

Why it can be worse

  • Bid/ask spread (small, but real)
  • Distribution timing (lumpy cash flows)
  • ETF mechanics during stress (small premium/discount intraday)

3) “Overnight return” ETFs that are not pure SONIA

This matters because the names can mislead you.

Example: CSH2 (Amundi Smart Overnight Return GBP Hedged, Acc)

Its objective materials describe tracking ESTR (euro short-term rate) compounded, then hedged into GBP. (Fidelity International)

That can still be a low-volatility cash-like parking tool, but it’s not the same thing as “I want SONIA”.

If you want distributing and GBP-native, you usually prefer the product that explicitly targets SONIA in GBP terms (like XSTR). (Xtrackers ETFs)

4) The one-page selection checklist (this is the part you’ll reuse)

When you’re choosing a brokerage-based cash tool, scan these items in this order:

Step 1 - What do I actually want: distributing or accumulating?

  • If you want cash paid out, choose Dist
  • If you want “set-and-forget compounding”, choose Acc

(For dry powder, distributing is psychologically clean: you see cash arrive.)

Step 2 - What is the reference: SONIA, or something else?

  • If it doesn’t say SONIA, assume it’s something else.
  • If it’s ESTR hedged, that’s valid, but different. (Fidelity International)

Step 3 - How is it replicated?

  • Swaps / synthetic: you’re accepting derivative structure risk (often fine, just be honest about it). (Hargreaves Lansdown)
  • Physical / repo / instruments: you’re accepting “what’s in the box” risk.

Step 4 - What are the real frictions?

  • TER (small but guaranteed) (Xtrackers ETFs)
  • Bid/ask spread (usually the hidden cost that matters for short holds)
  • Distribution frequency (are you okay with lumpy cash?)
  • Platform trading hours + execution quality (use limit orders)

Step 5 - Stress behaviour (the only time this stuff matters)

Ask: If markets wobble for a week, will this still behave like cash? For true “overnight rate” products, the answer is usually “mostly yes”, but you can still see small dislocations in price vs NAV intraday.

5) A “dry powder” blueprint (simple, practical)

If your broker already pays decent GBP cash interest, the cleanest set-up is:

Blueprint A: Maximum simplicity

  • Leave it as cash and take broker interest (if enabled). (Trading 212)

Blueprint B: Brokerage-based cash rate, distributing

  • Hold one SONIA-style distributing ETF (e.g., XSTR) as the core. (Xtrackers ETFs)

What I avoid for a 6-month job:

  • mixing multiple “overnight” funds (usually redundant)
  • adding “cash-plus” credit unless I intentionally want spread exposure

6) The honest comparison: broker cash vs SONIA ETF

Here’s the right way to think about it:

  • Broker cash interest wins on simplicity and zero trading friction.
  • SONIA ETFs win on “market rate in a portable wrapper”, at the cost of small ETF frictions.

If you’re building a system you’ll use repeatedly (park cash -> deploy -> park again), the SONIA ETF approach is neat. If you want the cleanest life today, cash interest is hard to beat.