Benstead on Bonds: the four gilts investors are backing – should you too?

Different to investing in listed shares – where nearly every company just has one option for investors to buy – there are often lots of bonds on the market from each issuer.  

The UK government is no exception. According to the Debt Management Office, there are 98 gilts in issue, across conventional and index-linked. This includes “ultra short” gilts maturing in just a couple of months, such as UNITED KINGDOM 2.75 07/09/2024 (LSE:T24), and “long” gilts maturing in 50 years’ time, such as UNITED KINGDOM 1.125 22/10/2073 (LSE:TR73).  

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This means that investors who want to own UK government debt have lots of choice. But rather than dragging investors into a wide range of different gilts, assets on interactive investor are concentrated in just a few bonds.  

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In fact, 42% of gilt investments on the platform are invested in just one gilt. The three most-popular gilts have collected  55% of the gilt assets. There is then a long tail of gilts with cash in.  

So, what’s behind the popularity of just a handful of bonds, and importantly, are investors right to flock to these investments? Let’s have a look at what investors are buying.  

TN25 

The most popular by quite a margin is TN25, full name: UNITED KINGDOM 0.25 31/01/2025.  

What do we need to know about this gilt? The first thing is that it matures at the end of January next year, meaning that investors are likely to be holding the bond to maturity to lock in a return from the UK government. According to bond data group Tradeweb, it yields an equivalent annualised return of 4.56%. Its next coupon (which is taxed as income) is paid on 22 July and the final coupon on maturity.  

The bond has a “dirty price” – which just means that it accounts for accrued interest since the most recent coupon payment – of £97, meaning that most of your return (3%) comes from when the bond pays back £100 to holders on maturity. This gain is capital gains tax free, making the bond an excellent option for investors holding it outside a SIPP or ISA.  

A bond’s total return – or yield to maturity – comes from the semi-annual coupons and the return of the par value of the bond when it matures. So, much of the return for this bond comes from the latter because the annual coupon is tiny at just 25p per £100 bond. It’s so low because interest rates were just 0.1% in the UK when the bond was issued in June 2021.  

The duration of the bond, which measures its sensitivity to interest rates, is just 0.7 years, meaning that the bond price won’t move much if interest rate expectations suddenly change.  

Taken together, it is clear that investors love this gilt because they are getting an inflation-beating return, with next to no default risk, very low volatility and very little tax to pay.  

T26 

The next most-popular bond is T26 – investors own this for the same reasons they own TN25. Like TN25, it has a very low coupon, at just 12.5p per £100 bond, because it was issued in May 2020, when interest rates were near zero and investors were worried about the economy after Covid hit.  

Tradeweb finds that the yield to maturity is slightly lower, at 4.2% on an annualised basis. Costing £93.2 today, the bond matures at the end of January 2026.  

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The low price means that, like TN25, nearly all the return comes from capital gains, which is tax free, rather than income from coupons, which are taxed as income. Because the bond has a longer time to maturity, the duration is higher at 1.7 years, but that is still a low figure for a bond and so the price will not be very volatile. 

The reasons to own this bond are clear: a fixed return over 20 months if held to maturity, with very low price volatility and very little tax to pay if held outside an ISA or a SIPP. I expect that when TN25 matures in January, a lot of money released from that bond will be reinvested in T26.  

TR25 

The next most-popular gilt offers something a little different. The TR25 gilt has a £5 annual coupon, indicating that it yielded around 5% when it was issued in December 2024. Given that’s not far off what gilts yield today, the dirty price is very close to par, at £101, meaning that the yield to maturity is slightly below the coupon, at 4.7%.  

Because the bond is trading close to par, the return for investors comes from the coupons. The next (£2.50) coupon is due on 9 September, and then a final coupon (£2.50) is paid on maturity. This suggests that investors own this bond for the income, rather than the capital gains. The total return is similar to TN25 and T26, but for this gilt it comes as coupons, rather than a capital return on maturity.  

TG61 

There’s one other popular gilt that is worth delving into as it offers investors another type of investment return from the gilt market.  

It is TG61, a bond maturing in just under 40 years’ time with a very low coupon, meaning that its duration is very high, at 29.5 years. This bond will undergo big price swings when investors change their views on the direction of interest rates. It was therefore one of the hardest-hit bonds when rates were rising, but will be one of the biggest gainers if rates are cut ahead of expectations.  

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Investors own this as a bet on lower rates, hoping for a big capital gain. For this reason it is a trade, rather than a way of locking in a return, as it’s very unlikely that anyone is intending to own this bond until it matures in 2061.   

That’s four gilts, offering four different types of return for investors. It makes sense why they are popular, and I expect more money to flow into the asset class as investors look to profit from falling interest rates and lock in a fixed, inflation-beating return from the UK government.  

Key gilt data

Source: Tradeweb, 12 May 2024. London Stock Exchange. Past performance is not a guide to future performance.