The bond supremacy

The crash has led to a new boom in corporate bonds. When Tesco’s debt yields more than its shares, every little helps

When the Bank of England began its £200 billion programme of quantitative easing — ‘QE’, its technical name for printing money — at the height of the credit crisis in March last year, it made two important discoveries.

The initial plan of the Bank’s markets director, Paul Fisher, was to use the money to buy up bonds issued by major companies. This, it was hoped, would put cash into company balance sheets and help prevent the crisis cascading though the rest of the economy. But the Bank quickly learned that, apart from a few blue-chip companies, the market in UK corporate bonds was virtually nonexistent. American companies have long been users of the bond markets, but the British have preferred to raise their new capital by creating and selling new shares. And, unlike the London markets in shares and gilts, the UK corporate bond market was far from perfect. It was something of a throwback to the days before the ‘Big Bang’ in 1986, when the City opened its door to all-comers in securities trading. Corporate bonds seemed to have been left behind, changing hands among a small group of market-makers who held little stock, which meant the price spread between buyers and sellers was dauntingly wide.

Fisher quickly concluded that if the Bank wanted to force-feed the money markets with cash — to make them more liquid — it would be quicker and more efficient to buy gilts. In the meantime, he would work with the corporate bond market in an effort to make it more transparent and efficient, so that it was better trusted by investors.