Bond Watch: new five-year gilt auction offering more than 4% income

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

Fancy more than 4% from the UK government?  

Interactive investor is offering customers access to another gilt auction: 4.125% Treasury Gilt 2029.

The offer closes on Monday 29 April – next week – with a minimum investment of £1,000 and then £100 increments after that, and a maximum investment of £500,000.  

• How to invest in the new gilt
• Benstead on Bonds: why gilt auction access is a win for small investors

The bond will mature in five years, on 22 July 2029. The coupon on the bond will be 4.125%, but given that five-year gilts currently yield nearly 4.3%, the bond will probably issue at a small discount to its £100 par value to give investors a slightly higher yield.  

ii customers will purchase the gilt at the non-competitive auction price, which is the average accepted price for the gilt.  

This is the second gilt that ii customers have been offered at auction. The first, T31, was a seven-year gilt yielding around 4%. 

Coupon payments from gilts are taxable as income if held outside an ISA or SIPP, but capital gains are not taxed on gilts. 

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Investors should be aware that because gilts are traded on secondary markets, investors buying this gilt at auction will see the capital value of their bond fluctuate when they own it.  This means that if they buy or sell the bond before its maturity then there could be a capital gain or less, depending on bond market movements.  

Another key point to be aware of is that gilts at auction will issue near the £100 par value, so returns come from coupons over the life of the bond, if held to maturity, rather than a capital uplift when the bond matures. 

This contrasts with low-coupon gilts, trading at a discount to par, which are maturing soon. Gilts such as UNITED KINGDOM 0.25 31/01/2025 (LSE:TN25) and UNITED KINGDOM 0.125 30/01/2026 (LSE:T26), which cost around £97 and £93, deliver most of their return when the £100 principal is repaid. This return is capital gains tax free. 

Why buy gilts at auction? 

First, it is cheaper. There is no commission to ii to participate in the auction, and no bid/offer spread to pay or trading fee (£3.99 if dealing online at ii), unlike when trading gilts already in issue. 

Another key advantage is that investors have more clarity on the yield they will receive, which is set following the auction. When buying gilts trading in the secondary market, the yield is a result of the market price of the gilt – this takes into account coupon payments and the return of £100 on maturity, calculated as the “yield to maturity”.