Bond Watch: the gilt attracting more cash than any other investment

Welcome to interactive investor’s ‘Bond Watch’ series, covering the latest market and economic news – as well as analysis – that is relevant to bond investors.           

Our goal is to make the notoriously complicated world of bond investing simpler, by analysing the week’s most important news and distilling it into a short, useful and accessible article for DIY investors.           

• Invest with ii: How Bonds & Gilts work | Tax Rules for Bonds & Gilts | Open a SIPP

A gilt, TN25, has seen the highest net flows of any investment available to interactive investor customers each month since June 2023.  

The amount held in this gilt has risen 28-fold since the first quarter of 2023. The bond was issued in summer 2021 before interest rates began to rise, yielding just 0.28% at the time, according to Refinitiv.  

T26  and TG24 have also been popular, with the gilts regularly featuring behind TN25.  

Gilts maturing soon, and with low coupons, are attracting more cash than popular active and passive funds, such as Vanguard’s LifeStrategy range or Fundsmith Equity, as well as in-vogue shares such as Nvidia, BP, and Lloyds – which often feature on interactive investor’s most-bought list of investments. 

Why investor interest in gilts is heating up 

Gilts are bonds issued by the UK government and hold next to no default risk. They pay two coupons a year and a £100 principal on maturity. The annual coupon on TN25 is 25p, split into two payments. 

Traded on secondary markets, yields changes as the market price of gilts change, linked to investor views on factors such as the economy and UK government policy. The coupon is fixed for the life of the gilt, unless it is an inflation-linked gilt. 

Yields on the three most popular gilts, assuming they are held until maturity, are currently 4.7% (TN25), 4.2% (T26) and 5% (TG24), according to Refinitiv. The bonds mature on 31 January 2025, 30 January 2026 and 22 April 2024.  

• Everything you need to know about investing in gilts
• Bond Watch: the low-risk, high-yield bond funds
• Benstead on Bonds: why gilt auction access is a win for small investors

Gilts have a special tax status: while their coupon income is taxed as income, capital gains are tax-free. Because a large part of the total yield from low coupon gilts issued when interest rates were near zero comes from the capital uplift when the bonds mature, they are a useful tool to pay less tax on investments held outside tax-efficient wrappers such as SIPPs or ISAs. 

Gilt yields hit a recent peak last summer, at around 5%, causing many investors who had steered clear of bonds to pay attention. That kickstarted flows into the asset class.  

Combined with tax benefits due to low coupons, there were, and still are, good low-risk returns on offer for investors who have maxed out their ISAs and have cash they want to lock away for relatively short periods.  

Even inside an ISA or a SIPP, getting around more than 4% annualised from a safe source such as the UK government is appealing for many investors. It suggests that investors are treating gilts like short-term savings accounts – picking the maturity date of a gilt that coincides with when they want to get their cash back. They then have plenty of other low-coupon bonds maturing soon that they can reinvest their cash into.  

While holding a gilt to maturity effectively locks in a return, the price of the bond will fluctuate until it matures, which may lead to a paper loss or gain. This is an added layer of complexity when owning gilts as a cash proxy that a savings account does not have, so investors should always do their own research and make they understand how gilts work before investing.