Bond Watch: new five-year gilt auction comes to ii
Sam Benstead breaks down the latest news affecting bond investors.
3rd January 2025 09:54
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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There’s a new gilt coming to market
Starting last year, interactive investor now allows customers to buy gilts at auction from the Debt Management Office at the average accepted price for the gilt, known as the Non-Competitive Auction Price.
Customers have up until 2.30pm on Tuesday 7 January to put in orders for the new 4.375% Treasury Gilt 2030, which can be done via our IPO page.
The gilt pays a coupon of 4.375% and matures on 7 March 2030 – in just over five years’ time.
Owners of the gilt are effectively buying a five-year fixed term savings instrument that will yield about 4.4% annually, based on current market conditions, if they plan to hold the gilt until maturity.
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While the bond is all but guaranteed to return its £100 issued value when it matures, as well as £4.375 a year in coupon payments split across two payments (7 March and 7 September), the price of the gilt will move as market conditions change.
Investors can sell gilts whenever they like before maturity, but they may get back less or more than they paid. However, generally, the sooner until the gilt matures, the less volatile it will be.
The minimum investment is £1,000, and then multiples of £100 thereafter. The maximum investment is £1 million.
Do you own the TN25 gilt?
It’s finally January 2025. While for most people that may mean new year’s resolutions or a “dry” month, for gilt investors it is significant for another reason.
The gilt with the most assets on our platform is UNITED KINGDOM 0.25 31/01/2025 (LSE:TN25), which matures on 31 January this year, paying investors back £100 per gilt they own and a final semi-annual coupon.
A significant amount of cash is therefore about to be deposited into customer accounts, and could be looking for a new home.
The timing is good for investors looking to reinvest this cash into short-term gilts, as yields have shot up since the summer.
Most two-year bonds now pay around 4.4% on an annualised basis compared with just over 3.5% in August.
Capital gains on gilts are tax-free, so the difference between the £100 redemption value of a gilt and the purchase price is tax-free if held in a General Investment Account – this makes gilts a very tax-efficient investment if they are held outside an ISA or SIPP and bought at a discount to their redemption value. However, these discounted bonds generally offer slightly lower yields because of increased demand for them.
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So, what gilts should investors be looking at if they are looking to hold to maturity, but not lock up their cash for too long?
Once TN25 matures, these gilts stand out due to their maturity dates and low coupons, meaning that they trade below their issue value.
UNITED KINGDOM 0.125 30/01/2026 (LSE:T26 )– Maturing on 30 January 2026, this gilt has a 0.125% coupon and costs around £96 to buy. Its yield-to-maturity (the expected annualised return if bought today and held until maturity) is 3.95%, according to Tradeweb.
UNITED KINGDOM 0.125 31/01/2028 (LSE:TN28) – Matures on 31 January 2028, this gilt also has a 0.125% coupon and trades at £88.70 per gilt. The yield is 4.07%.
UNITED KINGDOM 0.25 31/07/2031 (LSE:TG31) – Matures on 31 July 2031, this gilt has a 0.25% coupon and trades at £77.10. It yields 4.27%.
UNITED KINGDOM 0.375 22/10/2026 (LSE:T26A) – Maturing on 22 October 2026, this gilt pays a 0.375% coupon and trades at £93.50. The YTM is 4.14%.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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