Given that 80 billion pounds worth of short-dated gilts are about to mature, where should concerned investors place their money?

In recent months, gilt yields have gone up, but how can one best profit from the bond market?

When short-term gilts worth billions of pounds mature in the upcoming months, the bond market is expected to be rocked.

Following the 2022 mini-Budget and the 2023 interest rate hike by the Bank of England, many investors gravitated towards the safety of short-term or low coupon gilts.

Amidst economic uncertainty, the asset class has offered consolation to cautious investors.

Due to worries about the UK's economic situation, 10-year government bond yields earlier this year reached their highest levels since 2008.

However, 80 billion short-dated gilts are scheduled to expire in the first half of 2025, according to research by investment firm Abrdn.

This presents a problem for investors who are trying to find another place to put their money.

The difference now is that short-term yields are lower than they were a few years ago, which makes investors wonder where they should put their money if they want some security.

As interest rates increased recently, thousands of people purchased UK government bonds, according to Mark Munro, co-portfolio manager of the Abrdn Short-Dated Enhanced Income Fund. It has probably been a wise move, but this trade is much more difficult to duplicate in the future for two reasons.

"First off, yields on low coupon gilts are currently anywhere between 1 and 1 point 5 percent lower than their peak in 2023 and below the enchanted 5 percent mark, even though yields have been rising globally since September 2024.

Second, the supply of appropriate short-dated gilts is dwindling because two low-coupon gilts, totaling 80 billion, mature this year.

What does a low coupon gilt mean?

A government bond with an upcoming maturity date is known as a short-dated maturity gilt or low coupon.

A set yield is paid for a few years. Since you might only be saving for a few years, the yield is usually lower than yields with longer dates.

However, investors benefit from certainty and the fact that gilt is frequently cheaper to purchase than the issue value due to secondary market discounts.

Munro went on to say: "The appeal of short-dated gilts trading below their redemption value is one of the factors that has caused the surge.

According to this, investors who hold until maturity should profit, which is free from capital gains tax for gilts.

He cautions, however, that investors should carefully consider their next course of action as billions of short-dated gilts are about to expire.

Despite less appealing prices, gilts are still in high demand.

According to investment platforms like Interactive Investor, Hargreaves Lansdown, and AJ Bell, demand for gilts has increased recently.

The number of trades and the amount of assets invested in gilts increased by 75% annually, according to a January report from Hargreaves Lansdown, while trades increased by 93% monthly.

These numbers exceeded previous peaks for the quantity of assets in February 2024 and the number of trades in October 2024, making them the highest since 2021.

Does investing in short-dated bonds make sense?

Bond investors must choose between continuing to exercise caution and increasing their level of risk tolerance in the stock market.

Even though the current two-year gilt yield of 4.2 percent beats inflation, you might make more money in an easy-access account that allows you to take money out whenever you want.

Thera Wealth Management director Philip Dragoumis stated that since low coupon gilts are exempt from capital gains tax, purchasing them directly can still be a very tax-efficient option, particularly for higher or additional rate taxpayers.

"UK bonds currently continue to offer yields above inflation, act as a hedge against a potential recession, and serve as a diversifier," he continued.

"Investors with longer investment horizons and higher risk profiles can add more volatile longer-dated or inflation-linked bonds to their portfolios, while those who prefer lower volatility should consider short-dated bonds or funds.

However, Fairview Financial Management's independent financial adviser Ross Lacey advises investors to first think about the original reason for their gilt investment.

He went on to say: "In our experience, some investors held short-term gilts with the goal of holding them until maturity because that was when they would need the maturity value for a particular purpose... an overpayment on a mortgage or credit card.

They were not necessarily cautious investors; rather, they were those who thought that investing in gilt offered a higher post-tax return than putting the money in a savings account. Gilts are unlikely to be the best option for investors who want to aim for longer-term growth with a realistic chance of preserving their purchasing power.