Where to look next as low-coupon gilt matures
Kyle Caldwell explains the options for bondholders as a gilt matures having been issued during the era of ultra-low interest rates.
20th July 2026 16:30
by Kyle Caldwell from interactive investor
TG26, maturing on 22 July, is one of a number of gilts issued during the era of ultra-low interest rates.
As a result, many of these bonds have low coupons and trade below their £100 redemption value, resulting in a large part of the gain being the capital uplift when the principal is returned at maturity. Gilts are free from capital gains tax, although income tax is due on coupons if held outside ISAs or SIPPs.
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For investors looking to recycle their cash back into other low-coupon gilts, potential options include TG27 (UNITED KINGDOM 1.25 22/07/2027), TN28 (UNITED KINGDOM 0.125 31/01/2028), TG29 (UNITED KINGDOM 0.5 31/01/2029) and TG31 (UNITED KINGDOM 0.25 31/07/2031). These gilts continue to offer a relatively high proportion of their prospective return through the tax-free capital uplift.
Those looking for greater coupons could size up TR30 (4.75% Treasury Gilt 2030) and TR34 (4.5% Treasury Gilt 2034).
Bear in mind that a potential drawback for bonds with a long lifespan is that the price of the bonds can swing dramatically before they mature. This is because they have a higher “duration”, resulting in such bonds being more sensitive to changes in interest rates. This is important to weigh up for those intending to sell rather than hold until the gilts’ maturity.
The big concern worrying many professional investors is the prospect of stagflation, which occurs when a country experiences slow economic growth at the same time as high inflation. Its last prolonged appearance was in the 1970s.
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Stagflation is a difficult environment for bond investors as inflation weakens the real value of coupon and principal payments, while weaker growth means central banks are unable to intervene by reducing interest rates.
Against this backdrop, index-linked bonds and, specifically for UK investors, inflation-linked gilts re-emerge as a portfolio consideration. This gilt type offers a potential hedge against inflation risk as the balance of risks shifts back towards inflation uncertainty rather than a straightforward continuation of disinflation.
Bear in mind that index-link gilts have a high duration, meaning such bonds are more sensitive to changes in interest rates.
For example, in 2022, when interest rates and yields rose to tackle rapid inflation, the negative price effects on more rate-sensitive, higher-duration inflation-linked gilts offset the uplifts associated with the inflation-linking mechanism.
Therefore, selection can be key. The duration of the FTSE Actuaries UK Index-Linked Gilts All Stocks Index is 13.7 years versus 7.5 years for the FTSE Actuaries UK Conventional Gilts All Stocks Index.
For index-linked gilts, the “real yield” reflects what investors will receive over the UK inflation rate if held to maturity. However, bear in mind that the real yield can turn negative. When this occurs, investors do not receive the full inflation benefits.
Inflation-linked gilts include T27 (1¼% Index-linked Treasury Gilt 22/11/2027), T28 (UNITED KINGDOM 0.125 10/08/2028) andT29 (UNITED KINGDOM 0.125 22/03/2029).
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