Interactive Investor

Bond Watch: key gilt matures next week – what to do next

Sam Benstead breaks down the latest news affecting bond investors.

26th January 2024 10:55

Sam Benstead from interactive investor

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.     

Here’s what you need to know this week. 

TN24 matures on 31 January  

One of the most popular gilts among ii customers is set to pay its final coupon and return its £100 par value to investors. 

The gilt – stock market ticker TN24 – matures on 31 January. Investors buying over the course of last year would have received a yield of between 4% and 5%, depending on when they bought, and assuming they hold the bond to maturity. 

While income payments from gilts are taxed, capital gains are not. This means the difference between the buying price and the £100 par value returned next week is free from capital gains, making gilts a useful tax-planning tool for investors who have used up their ISA allowance.  

Other popular gilts maturing soon include TN25 (31 January 2025), TR25 (7 March 2025) and T25 (7 September 2025). 

Investors looking to keep money in the gilt market, but not lock up their cash for a long period, could look at these bonds. Bonds maturing in the next couple of years yield around 4.5% if held to maturity. 

Money market funds are also an option for yield-hungry but risk-averse investors. They own bonds maturing soon and use bank deposits to give investors a stable income without much capital risk. Popular funds include Royal London Short Term Money Market, L&G Cash Trust and Fidelity Cash, all which yield around 5%.  

While gilt yields have fallen due to investor expectations for lower interest rates this year, gilts maturing soon actually offer some of the highest yields available from gilts as a result of an inverted yield curve (see here for our explanation of what the yield curve is). This creates attractive opportunities for investors looking to invest for short periods and hold gilts until they mature. 

US GDP growth impresses 

The American economy continued to defy the impact of higher interest rates, registering 3.3% real GDP growth in the final three months of the year compared with the year before. This was ahead of economist forecasts and showed how resilient the US economy is, supporting the view that its central bank can successfully bring down inflation without crashing the economy, known as a soft landing. 

Ashwin Alankar, head of global asset allocation at Janus Henderson Investors, said: “As long as the Federal Reserve does not too eagerly cut rates and inject liquidity into the system, a second wave of inflation is at bay and the bank will have successfully normalised prices and avoided choking the economy.” 

He says that tighter US monetary policy (interest rates in America are currently 5.25% to 5.50%) for longer is ironically what we should cheer otherwise a second wave of inflation could appear.  

US bonds were relatively stable following the news, suggesting that investors did not expect it to change the Federal Reserve’s outlook for interest rates. The 10-year US treasury bond yields 4.1%.  

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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Related Categories

    Income Investor
    Bonds and gilts
    Funds