The corporate bond market in the UK is set to overtake the gilt market, according to Scottish Widows Investment Partnership.
This belief follows the release of company figures which show that corporate bonds have undergone dramatic growth and now represent nearly 50% of the total UK bond market.
Stuart McMaster, head of corporate bonds, said: “The importance of corporate bonds is likely to increase with recently proposed changes to valuation of pension liabilities in company accounts.”
According to Scottish Widows, the UK corporate bond market has grown from a value of £75bn at the start of 1996 to £207bn currently. The gilt market is currently valued at £226bn.
Figures released by Barclays Capital show that the government bond market has shrunk from a net issuance of 10000 in 1997 to about minus 15000 in 2000.
Scottish Widows attributes the growth of the corporate bond market to the changes to Advance Corporation Tax (ACT), which make it more attractive for companies to issue debt rather than equity - interest is tax deductible while dividends are not.
Secondly, bond yields are at historically low levels - companies are able to secure finance for the next 30 years at 6.5%, which equates to 4.6% allowing for the tax advantage.
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