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The Baroness and the Bond Market

April 8 (Bloomberg) -- Margaret Thatcher, who died today at the age of 87, transformed the U.K. by breaking the unions and privatizing large swaths of the economy. Less remembered is her role in the development of the inflation-indexed bond market in the late 1970s and early 1980s. This multitrillion-dollar market provides both retail savers and pension funds with an important tool for portfolio diversification. It also gives investors and policymakers important information about the state of the economy.

The oldest known indexed bonds were issued by the government of Massachusetts in 1780. However, these unusual instruments were quickly retired once the revolutionary war ended. Nothing like them was seen again for centuries. In 1975, the U.K. started offering non-marketable savings bonds that would maintain their real value even in the face of double-digit inflation, yet these "granny bonds" weren't helpful for pension plans trying to honor commitments to large numbers of retirees. Moreover, the prices of these instruments had little informational content because they couldn't be traded.