Investor Insights: Popular gilt matures this week – where to reinvest?

With a popular gilt maturing this week, we look at some of the options for bondholders to reinvest the capital.

Investors who have bought one of the most popular gilts on the Saxo UK platform, the low coupon gilt that matures on 30 January 2026, will need to decide what to do next with the lump sum whether they choose to sell the gilt before it matures or wait for the payment from the government. The UK 0.125% 30 January 2026 gilt is due to mature this week on 30 January.

Some investors may simply seek to reinvest the proceeds into a similar gilt. 

There are still a couple of low coupon bonds issued around the Covid era when interest rates were on the floor.

Available low-coupon, short-maturity gilts include the United Kingdom 0.125% 31 Jan 2028 that matures in two years, the United Kingdom 0.25% 31 Jan 2031,with five years to maturity, and the United Kingdom 0.375% 22 Oct 2026.

Investors have been focused on ultra-short-dated lower-coupon bonds. This makes sense for a number of reasons, not least the fact that it means investors are far less sensitive to rates and yield fluctuations. The tax treatment is also important - capital gains on gilts are exempt from taxation, while coupon payments (interest) are taxed as income.

Therefore, investors have preferred low-coupon gilts that generate most of their return through the capital appreciation as they approach maturity. These pay a lower rate of fixed interest, but as the bond moves closer to its maturity date its price moves up towards its nominal value. In effect this results in a higher after-tax yield for compared to higher-coupon gilts.

The effect is bigger in a higher yield environment when lower-coupon gilts are trading at a lower value, increasing the capital gain at maturity.

So in a lower yield environment where the effect is less pronounced, investors are looking at higher coupons once more, particularly if these are held within an ISA tax wrapper since holding gilts within the ISA tax-free wrapper offers complete tax exemption on both interest and capital gains.

If you prefer a higher coupon within an ISA tax wrapper rather than capital appreciation the United Kingdom 4.125% 29 Jan 2027, or the United Kingdom 6% 07 Dec 2028, which trades above the £100 issue price. The latter trades around £106, implying a capital loss on the price if held to maturity before income from the coupon is taken into account – which is about 3.72% per year.

Another option which has become more popular in recent years are money market funds, as investors hunt for yields that beat inflation.

The most popular fund of this kind at Saxo UK is the Royal London Short Term Money Market (accumulating), which typically offers a return close to the Bank of England base rate.

Read here for a deeper look at gilts.