The Baroness and the Bond Market

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

The oldest known indexed bonds were issued by thegovernment of Massachusetts in 1780. However, these unusualinstruments were quickly retired once the revolutionary warended. Nothing like them was seen again for centuries. In 1975,the U.K. started offering non-marketable savings bonds thatwould maintain their real value even in the face of double-digitinflation, yet these "granny bonds" weren't helpful for pensionplans trying to honor commitments to large numbers of retirees.Moreover, the prices of these instruments had littleinformational content because they couldn't be traded.