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.
13th October 2026 10:31
by Kyle Caldwell from interactive investor
Conflict in the Middle East has pushed up energy prices, stoking concerns about inflation and pushing central banks to embrace higher interest rates.
This backdrop has led to higher volatility across the bond market, causing prices to fall and yields to rise.
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Falls in bond markets will inevitably be painful for many of the funds invested there. However, investors who can buy a bond directly and simply hold it to maturity need not worry about such volatility, provided they resist the temptation to sell earlier on.
More individuals may well be tempted to take such a strategy, especially given that gains on direct gilt holdings are not subject to capital gains tax (CGT). Although, income tax is due on coupons if held outside ISAs or SIPPs.
T26A, maturing on 22 October, 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.
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).
Bond backdrop
The European Central Bank (ECB) and the US Federal Reserve both raised rates in September. The Bank of England did hold its rate at 3.75% but warned that it would be watching events closely.
Higher interest rates are painful for bonds because they erode the value of the fixed interest that they pay out.
The challenging backdrop has harmed all types of bonds, but particularly government bonds. As prices have slumped, yields gave risen. Some bond yields have reached multi-year or even multi-decade hights. Earlier this month, 10-year US Treasury yields briefly climbed above 5.3%, its highest level since 2002. The yield on a 10-year UK government bond is slightly higher, at 5.4%.
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.
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