Finance directors in search of low-cost capital should be issuing long-dated corporate bonds, according to Legal & General’s investment team. “With the current shape of the yield curve, we see exciting opportunities for bond issues,” said John Monckton, director of bonds at the insurance and fund management group. “Corporate treasurers can raise money very much more attractively than has been the case for many, many years.” So far this year, corporate debt worth £30bn has already been raised on the UK market, compared to £37bn for the whole of 1998. But L&G is convinced that low interest rates will sustain corporate bonds for some time. David Rough, director of investments, says that yields are low at the long end of market because of scarcity in the gilt market. The current gilt stock includes more than £90bn-worth of government debt due to mature within 5 years, with another £75bn in the 5-to-10 year range; but there is only just over £10bn-worth of gilts in the 25-to-30 years maturity range. “It’s almost as if the government is never going to issue long gilts again,” he said. Yields are further depressed because pension fund managers are pushed into long-dated gilts by the minimum funding requirement (MFR) rules, which currently do not recognise investment in good quality, long-dated corporate bonds. But with that policy currently under review – and no sign that the government will be making large tranches of long gilts available – corporate bonds look certain to become even more attractive investments. Even now, British Telecom can issue 30-year debt more cheaply than can the German or US governments.
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