Bond Watch: what to do when this gilt matures next week

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.           

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What other gilts are out there?

UNITED KINGDOM 2.75 07/09/2024 (LSE:T24) matures on Saturday 7 September, paying investors their final coupon and their £100 principal per gilt owned.

Holders of the gilt will be left with cash in the accounts to invest, but what should they do with it?

For those looking to buy another short-dated gilt, there are some great options to consider.

The gilt with the most assets in is currently UNITED KINGDOM 0.25 31/01/2025 (LSE:TN25), which matures in January 2025. It offers an annualised yield-to-maturity (YTM) of around 4%.

However, it has just five months until maturity and this may be too short a time period for some investors.  

Alternatively, one gilt that stands out is UNITED KINGDOM 0.125 30/01/2026 (LSE:T26), which matures in 17 months’ time, at the end of January 2026. This gilt has a YTM of 3.7%, and costs £95 to buy.

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Finally, I’d point investors to UNITED KINGDOM 0.125 31/01/2028 (LSE:TN28), which matures one year after T26. It also has a YTM of 3.7% and costs £88.50 per gilt.

Returns from gilts, if held to maturity, come from the coupon payments and the return of the £100 principal on maturity.

Gilts have a special tax status whereby any capital gains are tax free, but coupons are taxed as income. Given that T26 and TN28 trade at discounts to their £100 redemption value, and have low coupons, most of the return comes when the gilt pays back £100 on maturity, which is not liable for capital gains tax.

For investors who hold gilts outside an ISA or SIPP, this leads to even greater returns when accounting for tax savings.

Other low-risk investment ideas

With gilt yields dropping to 3.7% on the short end, investors hunting for higher yields may want to look elsewhere.

One option is money market funds, which own baskets of bonds maturing soon (often within a few months), as well as making use of overnight bank deposit accounts.

These types of funds, such as Royal London Short Term Money Market, abrdn Sterling Money Market and L&G Cash Trust yield about 5%. However, yields are closely tied to the Bank of England base rate and will fall as interest rates drop.

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Short-dated corporate bond funds can bring higher yields, but also some interest-rate sensitivity, meaning that there could be capital gains as interest rates fall, or some losses if rates rise again.

abrdn Short Dated Enhanced Income invests in corporate and government bonds maturing in less than a year, and yields 5.5%. Other popular short-dated bond funds include Royal London Short Term Fixed Income, Vanguard UK Short Term Investment Grade Bond Index and Fidelity Short Dated Corporate Bond fund.

Funds, even if they invest in gilts, do not carry the same tax breaks as owning gilts directly.